BofA Profit Feels Tax Sting -- WSJ
January 18 2018 - 3:02AM
Dow Jones News
Net fell 48% in latest quarter on large write-down but bank
offers an upbeat outlook
By Rachel Louise Ensign
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 18, 2018).
Bank of America Corp. said a charge from the new U.S. tax law
caused quarterly profit to fall by 48%, even as the bank ended 2017
with its crisis-era issues firmly in the past.
The Charlotte, N.C.-based bank on Wednesday reported
fourth-quarter profit of $2.37 billion, or 20 cents a share. That
was down from $4.54 billion a year earlier.
Without the $2.9 billion tax charge, however, the bank's profit
would have risen to $5.3 billion, or 47 cents a share. Analysts
polled by Thomson Reuters had expected earnings of 44 cents a share
on an adjusted basis.
For the year, the bank posted a $21.1 billion profit, excluding
the tax adjustment. That roughly matched the bank's all-time profit
record from 2006, when it was a simpler consumer-focused firm that
hadn't yet bought ailing mortgage lender Countrywide Financial
Corp. or investment bank Merrill Lynch & Co.
The bank's executives said Wednesday that the 2018 outlook is
bright. That is because the one-time hit from the tax bill is
expected to be outweighed by the law's longer-term benefits.
The fourth-quarter charge was largely due to the bank writing
down its deferred tax assets. These credits to offset future tax
bills were created by past losses, in many cases huge ones racked
up during the financial crisis. The assets generally lose value
when tax rates fall.
The bank expects its effective tax rate for 2018 to be 20%, down
from an expected 29% before the new tax law, Chief Financial
Officer Paul Donofrio said on a call with reporters Wednesday
morning.
Chief Executive Brian Moynihan said he expected most of the
bank's benefit from the tax cut would go to shareholders, who
should expect higher capital returns in the form of dividends or
share buybacks. Some of it will be spent on investments. Mr.
Moynihan also reiterated that he expected tax changes would
eventually lead to more loan growth.
The benefits from the tax bill are expected to accelerate the
progress Bank of America has made rebuilding its business after the
financial crisis. As recently as 2014, the lender's results were
dogged by tens of billions of dollars in penalties over
financial-crisis era issues. Since then, the company's legal
problems have eased, as Mr. Moynihan has made a concerted effort to
cut costs and focus on safer businesses such as lending to
consumers with good credit.
The boost from the tax bill will expedite the bank's timeline
for meeting long-held performance goals of a 1% return on assets
and a 12% return on tangible common equity, Mr. Moynihan said.
Excluding the effect of the tax bill, those metrics stood at 0.9%
and 10.9% in the fourth quarter.
The bank has recently had the help of rising interest rates,
which are boosting profits. Bank of America's net-interest income
was $11.46 billion, up about 11% from a year earlier. It paid
slightly higher rates to depositors in the quarter, though holders
of regular savings accounts are still getting almost nothing in
interest. The rate the bank paid on U.S. interest-bearing deposits
was 0.27%, compared with 0.24% in the prior quarter.
It also cut expenses to $54.74 billion on the year, coming
closer to a $53 billion target the bank has set for 2018. Revenue
for the year rose 4% to $87.4 billion.
There were still some hiccups in the quarter. One was a $292
million charge related to "a single-name non-U.S. commercial"
client in the fourth quarter. A person familiar with the matter
said this came from the bank's lending activity involving troubled
firm Steinhoff International Holdings NV. JPMorgan Chase & Co.
and Citigroup Inc. both took similar charges for loans involving
the retailer, which is battling burgeoning financial problems after
disclosing possible accounting irregularities.
Trading revenue was another weak spot, as it has been for other
large U.S. banks including Goldman Sachs Group Inc. Excluding an
accounting adjustment, Bank of America's trading revenue fell about
9% to $2.66 billion from $2.91 billion in last year's fourth
quarter, though that was less than the bank initially
predicted.
The lender's improving fortunes recently helped lift its stock
above $30 a share for the first time since 2008. Shares are up more
than 80% since the 2016 presidential election, when hopes for
deregulation, tax cuts and rate increases sent stocks in the sector
higher. Shareholders greeted Bank of America's latest results with
caution, sending the bank's shares 0.8% lower in morning
trading.
The bank had to issue so many new shares to deal with its
crisis-era problems that per-share profits remain far below
pre-2008 levels. And Bank of America still trades at a lower
valuation than some competitors like JPMorgan Chase.
Write to Rachel Louise Ensign at rachel.ensign@wsj.com
(END) Dow Jones Newswires
January 18, 2018 02:47 ET (07:47 GMT)
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