The year-end profitability of the biggest banks had almost nothing to do with their actual profitability. Let me explain. The Tax Cuts and Jobs Act of 2017 resulted in some of the largest banks taking huge write-offs in the fourth quarter, which made things look dismal indeed, except that they weren’t.
New York-based Citigroup, for example, took a $22 billion charge related to the tax changes, including a $19 billion charge for the decreased value of its tax deferred assets under the new law. The amount was so huge, that it made the bank swing from a profit to a loss for the full year (see table below).
Nonetheless, the new tax law will be good for Citigroup and numerous other banks in 2018 and in the coming years, because the law greatly reduces the corporate tax rate. Without the tax charge, Citigroup would have made a 6 percent year-over-year increase in net income for the year, to $15.8 billion.
Bank Director digital magazine ranked the largest retail-oriented U.S.-based bank holding companies by assets and found that the tax law fundamentally swung results for the year. U.S. Bancorp, one of the strongest banks in the country, topped the list of most profitable banks in 2017, in part because it benefited from changes to the tax law. Wells Fargo & Co. was no. 2, reporting a net benefit from the tax law changes.
Excluding the impact of the write-offs in the fourth quarter, the bottom line for most of top five bank holding companies was that revenue was up, margins are improving, profitability is improving and loans are growing. Not a bad story at all.
“The underlying profitability improved year over year for most banks, and next year, we’re going to see a step up on an ROA [return on assets] basis,’’ says Brian Kleinhanzl, a managing director and equity research analyst at investment bank Keefe, Bruyette & Woods. “Profitability is much improved, especially compared to a few years ago. Loan growth is up. Rates are higher.”
Even scandal-plagued Wells Fargo & Co. saw year-over-year growth in net income and revenue, although loan growth fell 1 percent in the quarter. “It was a tough year for Wells, but because they’re so profitable, a bad year for Wells is better than a good year for a lot of banks,” says James Sinegal, an equity analyst at the independent research firm Morningstar.
Wells Fargo’s Chief Financial Officer John Shrewsberry attributed the bank’s decline in commercial loan balances for the fourth quarter to the fact that competitors were lowering credit standards and getting more aggressive on pricing, but he expects loan growth next year in C&I, first mortgages and credit cards. “[Wells Fargo] has [had] quite a few quarters of disappointing loan growth,” says Kleinhanzl, who believes that Wells’ recent account opening scandal probably did hurt the bank.
In contrast to Wells Fargo, Bank of America Corp. saw strong long growth in the fourth quarter, as average loan balances were up 6 percent year over year. Bank of America, Citigroup and JPMorgan Chase & Co. either have huge trading or investment banking arms, or global businesses that impact the bottom line. Volatility was muted, especially in fixed-income, currency and commodities, so that hurt profits at some of the biggest trading houses, including Bank of America, Sinegal says. Still, Bank of America reported a fourth quarter profit of $2.4 billion, despite a charge of $2.9 billion for revaluing its tax deferred assets and energy-related investments under the law.
JPMorgan also reported a big charge in the fourth quarter: $2.4 billion attributable to the tax law changes. That dropped net income by 37 percent in the fourth quarter compared to a year earlier, to $4.2 billion.
Full year net income was $24.4 billion, a decline of 1 percent from the year before. But regardless, the bank was able to grow loans, deposits and revenues year over year. The only segment that didn’t grow revenues last year for the bank was corporate and investment banking.
Still, the big story for banks in 2018 won’t be who has the most growth in loans, or how the tax law benefits one more than the other. It will likely be a story about rising interest rates and the strength of core deposits, which will become a big factor next year in differentiating the profitability of big banks, says Sinegal.
TOP RETAIL BANKS, RANKED BY PROFITABILITY
|ASSETS, 4TH QUARTER, 2017 (MILLIONS)||ROAA YEAR END||ROAE YEAR END|
|2||Wells Fargo & Co.||$1,951,757||1.15%||11.35%|
|3||JPMorgan Chase & Co.||$2,533,600||0.96%||10%|
|4||Bank of America Corp.||$2,281,234||0.8%||6.72%|
Source: Bank earnings statements.
Ranked by: Federal Reserve's list of top bank holding companies. Morgan Stanley and Goldman Sachs were excluded.