The six largest U.S. banks could see net income rise $6.4 billion, or 7 percent, if President Donald Trump and Republicans in Congress can push through their proposed corporate tax rate cut.
Banks stand to benefit more than other industries because they typically have fewer deductions. The top six firms -- JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley -- paid an average of 26 percent in federal taxes last year, almost twice the average for nonfinancial companies, according to data compiled by Bloomberg. The Republican framework released Wednesday calls for lowering the corporate rate to 20 percent from 35 percent.
The estimates for the tax savings are based on the firms paying a 20 percent effective U.S. federal rate, assuming current deductions are no longer allowed. While earlier versions of Republican tax proposals have talked about eliminating some deductions, the latest plan has scant information on such changes. If some deductions are kept, banks would end up with a lower effective tax rate and their savings would be even greater.
US Banks were among the biggest initial beneficiaries of President Trump’s election victory last November, but have spent much of this year ranging as details of just how they might benefit have remained elusive. The plan currently proposed lends some clarity. Since the cut to corporate tax rates is a cornerstone of the legislation, banks will benefit both from paying less but also from customers with more free cash flow.
The S&P500 Banks Index is now testing the upper side of its range and a clear downward dynamic would be required to question current scope for a successful upward break.
The KBW Regional Banks Index Regional Banks Index rallied this week to break its progression of lower rally highs, for the year, suggesting it is not only the large banks which stand to benefit from revisions to the tax code.