U.S. banks like JPMorgan Chase & Co. (JPM) would thrive under President Donald Trump's tax proposal, as the firms benefit from a cut in the corporate rate while being spared from potentially painful provisions like the elimination of the deduction for mortgage interest.
The corporate tax rate under Trump's plan would drop to 20%, according to an outline of the plan released Wednesday by the U.S. Treasury Department, from the current 35%. While the proposed figure is higher than the 15% that Trump has pushed for, it's below the rate of 28% to 30% that many analysts and investors had expected a few weeks ago, said Jaret Seiberg, financial-services and policy analyst at Cowen Washington Research Group in Washington.
"The rate cuts are deeper than had been anticipated," Seiberg said in a telephone interview. "That's likely to lead to more economic activity, which at the end of the day is really what's best for banks. They thrive when the economy's booming."
Indeed, JPMorgan CEO Jamie Dimon, who chairs the Business Roundtable lobbying group, described the proposal as "an encouraging step forward" in a statement.
"Congress must act with urgency on this framework and move the legislative process forward," he added. "Congress and the administration are committed to tax reform, and business leaders are equally committed to pushing beyond our parochial interests to achieve a result that benefits the economy and American workers."
Bank stocks rallied earlier this year on investor bets that Trump's tax plan, when coupled with a rollback of regulations imposed following the 2008 financial crisis, would bolster corporate profits and economic growth. More recently, the stocks had retreated as Trump failed to achieve other campaign promises, such as overhauling former President Barack Obama's healthcare law -- a signal that the tax changes, too, might be in danger.
Yet much of the advance has stuck. On Wednesday, an index of large-bank stocks climbed 1.6%, bringing the gain over the past 12 months to 40%.
Keefe, Bruyette & Woods, a New York-based brokerage firm specializing in financial companies, estimated in a Sept. 18 report that the tax savings alone could increase earnings per share for big banks by about 12% on average, with an additional boost of 3% from faster economic growth. And that projection assumed a cut in the corporate tax rate to just 25%.
According to the Treasury Department, the average corporate rate for the industrialized world is 22.5%.
The Treasury said in a statement that homeowners would retain a popular deduction for interest on home loans. Elimination of that perk might have curbed demand for mortgages, while also putting downward pressure on housing prices, said Richard Bove, a bank analyst at Vertical Group.
The firms also are likely to benefit from provisions to reduce taxes on companies' overseas earnings. According to the Treasury Department, such measures would end the "perverse incentive to offshore jobs and keep profits overseas."
Large banks "are just as interested in being able to repatriate foreign earnings, tax efficiently, as anyone else," said Robert Willens, a tax consultant based in New York. "Many of them have large unpatriated balances on their books."
One potentially negative aspect of the tax blueprint for lenders like Bank of America Corp. (BAC) , Citigroup Inc. (C) and Wells Fargo & Co. (WFC) is a proposal to limit the deductibility of interest expense for corporations.
Such a measure could hamper companies' after-tax return on investment, which might put a damper on new plants or capital projects and, in turn, reduce demand for corporate loans, Bove said.
"Obviously, the economics of the plant change," Bove said in a telephone interview. "If you can't deduct it, you're going to rethink building that factory."
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It's not clear whether banks will be able to deduct their own interest payments, according to Willens. That's a key question since the firms get much of their funding for loans from deposits and borrowings. Willens predicted banks will be allowed to continue deducting their interest payments.
"It would be highly unlikely and unusual to not have a carve-out for businesses that literally use money as their raw material," Willens said. "It's just inconceivable to me that they would lose their interest deductions."
Chris Kotowski, a bank analyst at Oppenheimer & Co., cautioned that competition might ultimately force firms to pass some of the tax savings to customers -- in the form of lower lending rates or fees.
"I would expect that most of that benefit would end up going to the bank customers rather than the shareholders," Kotowski said.
The tax blueprint didn't mention another key deduction -- for state and local income taxes. According to Seiberg, the absence of a mention is a signal that the deduction might be scrapped or limited -- a big factor for taxpayers in states with high income-tax rates.
"That could be material on individuals," he said. "What's best of the bank is for people to be transacting more, so if this is a tax cut that ends up not really saving consumers money, it won't do much good."
Overall, though, bank investors should be elated by the Trump administration's plan, Willens said.
"This is about as good as it gets," he said.
And for critics, that's precisely the problem.
The plan "delivers massive tax cuts to millionaires and giant corporations and kicks working families to the curb," Sen. Elizabeth Warren, a Massachusetts Democrat who has pushed stricter regulation of large banks, said in a statement.
"Not one penny in tax cuts for the wealthy and giant corporations," she added, promising to fight the plan. "Especially not on the backs of everyone else."
Updated from 6:30 a.m. ET on Thursday, Sept. 28, 2017.
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