The new tax law is having a short-term negative effect on profits at the nation's banks. Most, like Bank of America which reported earnings Wednesday, have announced big one-time charges that cut into profits. But overall, the new law is a good thing for banks.
Bank of America reported a fourth-quarter profit of $2.4 billion. That was about half what it earned a year ago. Citigroup reported a massive $18 billion loss, and other banks are in the same boat.
You can blame the new tax law. Here's what happened:
Bank of America and other banks keep a pile of old losses on their books, called deferred tax assets. These are losses from investments or losses inherited when they bought other companies.
Banks typically don't report losses like these all at once, but carry them forward from year to year. If the company has a highly profitable quarter, those losses can be used to reduce profits - and taxes.
But the new tax law dramatically cuts the maximum corporate tax rate - from 35 percent to 21 percent. That means those old losses aren't worth as much. Under accounting rules, that change has to be reported.
So Bank of America wrote off $2.9 billion in value of those deferred tax assets at year's end. That reduced profits, but had no effect on how CEO Brian Moynihan described the quarter to analysts.
"This is another strong quarter for our company across the board," Moynihan said.
Revenues were up, expenses were down, the company is making more loans. And, excluding that write-off, profits would've risen, too, he says: "We would've reported net income of $21 billion, which is up 18 percent over a solid 2016. This represents the highest earnings run rate for the company in its history."
Meanwhile, Moynihan says the lower tax rate means higher profits ahead. The question is how BofA and other banks will spend that windfall. CEOs and analysts say they could return some to shareholders, through a higher dividend or stock buybacks - which drive up the share price. They could add staff or make other investments in their businesses. Or they could raise pay, as they did last month when they announced one-time $1,000 bonuses for many employees.
How banks manage those options will be a banking story to watch in 2018.
