WASHINGTON: The nation’s six big Wall Street banks posted record, or near record, profits in the first quarter, and they can thank one person in particular: President Donald Trump.
While higher interest rates allowed banks to earn more from lending in the first quarter, the main boost to bank came from the billions of dollars they saved in taxes under the tax law Trump signed in December.
Combined, the six banks saved at least US$3.59 billion last quarter, according to an Associated Press estimate, using the bank’s tax rates going back to 2015.
Big publicly traded banks — such JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley and Bank of America — typically kick off the earnings season. The reports for the January-March quarter are giving investors and the public their first glimpse into how the new tax law is impacting Corporate America.
Before the change in tax law, the maximum U.S. corporate income tax rate was 35 per cent, not including what companies paid in state income taxes. Banks historically paid some of the highest taxes among the major industries, due to their U.S.-centric business models. Before the Trump tax cuts, these banks paid between 28 to 31 per cent of their income each year in corporate taxes.
The results released over the past week show how sharply those rates have dropped. JPMorgan Chase said it had a first-quarter tax rate of 18.3 per cent, Goldman Sachs paid just 17.2 per cent in taxes, and the highest-taxed bank of the six majors, Citigroup, had a tax rate of 23.7 per cent. This is just one quarter’s results, however, and bank executives at the big six firms have estimated that their full-year tax rates will be something closer to 20 per cent to 22 per cent.
In its calculation, the AP used an average of full-year tax rates paid by the banks in 2015 and 2016. Full-year tax rates for 2017 were excluded from the calculation since all the banks, with the exception of Wells Fargo, had to take significant one-time charges late last year to come into compliance with the new tax law.
These charges were largely accounting adjustments but caused most of the banks to report a much higher tax rate in 2017 than they would have historically. Including them in the calculations would have distorted the amount of tax savings each bank would have hypothetically had.
The AP’s calculations are roughly in line with what Wall Street analysts predicted earlier this year. A report by bank industry analyst Mike Mayo of Wells Fargo Securities estimated that that the big U.S. banks combined would save roughly US$19 billion in taxes for the full year.
“If there was one significant factor this quarter for the big banks that I follow, it was taxes,” said James Shanahan, an analyst with Edward Jones.
Bank executives have said the majority of the savings from the lower tax rates will be returned to shareholders in the form of higher dividends and stock buybacks. Some of the money has gone toward higher wages for employees, and new business investments.
