By Emily Glazer and Peter Rudegeair
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (January 13, 2018).
JPMorgan Chase & Co. and Wells Fargo & Co. posted
fourth-quarter earnings that were roiled by the recent tax overhaul
but forecast the changes would bolster future profits and stoke the
broader U.S. economy.
JPMorgan, the biggest U.S. bank by assets, said a $2.4 billion
charge related to the recently enacted tax law caused its profit to
fall 37% from a year earlier to $4.23 billion. Even so, Chief
Executive James Dimon said the tax law enacted late last year was
"a big, significant positive and much of it will fall to our bottom
line in 2018 and beyond."
Other big banks, including Citigroup Inc. and Goldman Sachs
Group Inc., have said the tax law will result in billions of
dollars in one-time charges when they report fourth-quarter results
next week. They, too, have said those hits would give way to
substantial long-term gains.
That bodes well for banks, coming at a time when the economy is
showing strength, unemployment remains low and interest rates are
inching higher.
"The backdrop is set up well for these banks: higher interest
rates, improving GDP growth that has to help loan growth," said
Gary Bradshaw, a portfolio manager at Dallas-based Hodges Capital
Management, which owns shares of Wells Fargo, Citigroup and Bank of
America Corp.
At Wells Fargo, the immediate impact of the tax law was a gain
due to shrinking tax liabilities, which boosted net income by about
$3.35 billion.
PNC Financial Services Group Inc., which also reported earnings
Friday, similarly cited a tax-related boost to net income due to
the declining value of tax liabilities. CEO William Demchak said in
an interview it will take time to see how the tax-code changes play
out among customers and consumers, or if it ultimately spurs more
borrowing.
But overall, "for all the investment decisions that companies
make, the U.S. just got that much more attractive," Mr. Demchak
said. "It's going to win more than it won before in terms of where
people choose to do business activity and invest."
David James, director of research for Denver-based James
Advantage Funds, said the tax-overhaul impact is "music to people's
ears" and is hopeful higher profits will lead to increased
dividends and buybacks at banks like JPMorgan. He cautioned,
though, that investors will soon bake in boosts from the new tax
law into banks' expectations.
"If this becomes the new normal it may become harder to impress
the markets," said Mr. James, whose firm's James Balanced: Golden
Rainbow Fund owns about $11.5 million of JPMorgan shares.
For JPMorgan, the one-time charge is related to changes in the
value of the bank's deferred tax assets and the need to repatriate
profits held overseas. Its corporate and investment bank, in
particular, felt the blow.
Wells Fargo and PNC, on the other hand, had net deferred tax
liabilities. The changes to the tax code caused them to write down
that part of that liability -- taxes payable in the future -- which
resulted in a gain that boosts reported results.
The varied effects of the tax law and the complexity it
introduced into earnings masked differences in the underlying
performance of JPMorgan and Wells Fargo.
JPMorgan's results were solid, led by a record profit in its
commercial bank, which jumped 39% to $957 million from the
year-earlier period. Profit in its consumer and community bank unit
rose 11% to $2.63 billion from the fourth quarter of 2016.
But JPMorgan's corporate and investment banking unit was weighed
down by weak trading, slumping 17% to $3.37 billion after stripping
out the tax-overhaul impact. It also was hit with losses as high as
$273 million related to client Steinhoff International Holdings NV,
which is dealing with a wide-ranging accounting probe that is
expected to also dig into other large banks' results.
Wells Fargo, meanwhile, continued to suffer from its regulatory
headaches. While it gained from the tax changes, that was offset by
$3.25 billion in new litigation charges. The bank said this was the
result of "a variety of matters," including mortgage-related
investigations, its sales-practices scandal and other
consumer-banking issues.
The bank's loan portfolio shrank in the fourth quarter, the
profitability of its lending activities declined and businesses
like mortgage banking and investment banking contracted.
The bank hasn't incorporated much economic impact from the tax
overhaul into its current forecast, but executives said they
thought consumers would likely benefit.
"There have been millions of employed folks across the country
that have gotten pay raises and bonuses and the like and I think
that's a net positive for economic growth," Wells Fargo CEO Tim
Sloan said on an analyst call.
JPMorgan's Mr. Dimon also was optimistic, noting the bank
expects to have roughly $3.6 billion in additional net income as a
result of the tax overhaul.
He cautioned that there are uncertainties ahead since many of
the business-tax changes will require new regulations from the
Treasury Department, and that has yet to happen. But the bank has
ideas on how it can use the windfall.
JPMorgan finance chief Marianne Lake said the bank plans to
"continue to lean into" investment opportunities such as its own
bankers and offices, potential global expansion, digital
capabilities and payments. JPMorgan's strategy on dividend
increases and its repurchase programs "might be a bigger dollar
number," too, she said.
More broadly, Ms. Lake said she expects small business and
commercial banking will have new catalysts for spending because of
the tax overhaul. "Already very good credit trends we think will be
good for longer," she said.
The new tax code also could prompt greater competition for new
business among banks.
"If the economy heats up because of tax reform and everybody's
got higher loan growth, then somebody may very well begin to defend
their deposit franchise in order to fund it," said John
Shrewsberry, Wells Fargo's finance chief.
--Christina Rexrode contributed to this article.
Write to Emily Glazer at emily.glazer@wsj.com and Peter
Rudegeair at Peter.Rudegeair@wsj.com
(END) Dow Jones Newswires
January 13, 2018 02:47 ET (07:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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