Tax Reform Proposals Not All Positive for Banking Industry (Updated)

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By Allyson Versprille

Banks, with their current high effective tax rates, may be among the biggest winners in tax reform. But provisions of pending legislation—and bank regulations—complicate the outlook, especially for large banks.

“We estimate banks could see a 12% drop in their effective tax rates while earnings accrete 18% assuming no changes to competition” or other factors, Kevin Barker, a senior research analyst at investment banking firm Piper Jaffray & Co., wrote in a Nov. 13 note about the impact of the House and Senate tax plans.

In a similar vein, Frederick Cannon, director of research at the investment banking firm Keefe, Bruyette & Woods Inc., said in a Nov. 12 note that capital markets and smid-cap banks may be the largest beneficiaries of tax reform. Under the current proposals in Congress, Wells Fargo & Co. and JPMorgan Chase & Co. would be two leading beneficiaries, he said.

Both tax packages would cut the corporate tax rate to 20 percent from 35 percent—the House bill in 2018, the Senate plan in 2019. Both would do away with the corporate alternative minimum tax.

Still, there are several provisions that could be less positive for banks. Both bills, for example, would prevent banks with more than $50 billion in assets from deducting Federal Deposit Insurance Corp. premium assessments as business expenses. Barker estimated the change would raise the effective tax rate of large-cap banks by 2.2 percent.

“Even the reduction in tax rates, oddly, can be seen as something of a negative for banks since many banks have net deferred tax assets,” said Robert Willens, president of tax and consulting firm Robert Willens LLC in New York.

A reduction in the corporate tax rate necessitates a write-down of deferred tax assets—benefits included on a company’s balance sheet, such as net operating losses, that it expects to use to cut its future tax bills, he said. “Such a reduction would penalize earnings in the year of the write-down and will lead to a corresponding reduction in the banks’ shareholders’ equity,” Willens said in an email.

Citigroup Inc. in its most recent annual report disclosed $46.7 billion in net deferred tax assets.

Repatriation Taxes

Banks with foreign subsidiaries would deal with repatriating overseas profits, where both the House and Senate proposals call for tax rates that are higher than expected, said Andrew Silverman, a tax policy analyst for Bloomberg Intelligence.

The House bill ( H.R. 1) would impose a one-time tax on existing profits held overseas—a 14 percent rate on cash and cash equivalents and a 7 percent rate on illiquid assets. The Senate proposal would have a similar two-tiered structure but with rates of 10 percent and 5 percent. (For a road map of where to find key provisions and compare the House tax reform bill (H.R. 1) with the Finance Committee version, read Bloomberg Tax’s analysis.)

Previous GOP proposals, like the House blueprint released in 2016, set the rates at 8.75 percent for cash or cash equivalents and 3.5 percent for other assets.

Under the House and Senate proposals, U.S. banks with foreign subsidiaries would pay those higher repatriation rates—but they may not be able to bring all of their offshore earnings back to the U.S. because of international banking regulations, Silverman said.

“Banks, even U.S. banks, that are operating in Europe have to comply with Basel III, which means that they have to have a certain amount of capital located in the jurisdiction itself—so in Britain, in France, in Germany—in order to comply with those regulations,” he said. Basel III is an international regulatory framework that was produced in 2010 by the Basel Committee on Banking Supervision at the Bank for International Settlements, that, among other things, increased capital holding requirements for banking organizations.

“If the banks are taxed on offshore profits, they’re not going to be able to bring those back to the United States because they have to leave them” in those foreign jurisdictions “to comply with banking regulations,” Silverman said.

Willens agreed that banks may be constrained in their ability to extract income from their foreign subsidiaries that’s deemed repatriated. “This might create an unfortunate mismatch and leave the banks scrambling to fund the ensuing tax liability.”

FDIC Assessment Deduction

Both Silverman and Willens noted the provision in both the Senate and House plans that would end the biggest banks’ ability to deduct FDIC premium assessments.

“The large money center banks, which tend to have consolidated assets well in excess of $50 billion, will not be able to deduct any portion of the payment,” Willens said.

Banks with $10 billion to $50 billion in assets would have their FDIC assessments prorated depending on their size, while banks with under $10 billion in assets would still be allowed to fully deduct the assessment.

In his note, Cannon mentioned this change but called it a “relatively minor offset” to the benefits banks would reap from tax reform. But he also said: “We fear that the largest banks could be targeted for further tax penalties.”

Barker said banks will likely have a difficult time lobbying against this provision, “given they are widely viewed as some of the biggest beneficiaries of tax reform versus other industries.”

NOL Limitation

Both the Senate and House proposals would change the net operating loss deduction.

A net operating loss is taken in a period in which a company’s allowable tax deductions are greater than its taxable income. A business can use its NOLs by deducting the amount from its income in another year or years.

According to a Nov. 10 Tax Foundation analysis, the House bill would eliminate NOL carrybacks, while providing for indefinite NOL carryforwards—increased by a factor reflecting inflation and the real return to capital—but it would also restrict the deduction of NOLs to 90 percent of current-year taxable income.

The Senate version would eliminate NOL carrybacks while limiting NOL carryforwards to 90 percent of taxable income beginning Jan. 1, 2018. Starting on Jan. 1, 2024, that 90 percent cap on the NOL deduction would be reduced to 80 percent.

The change “could affect the banks since many of them have NOLs,” Willens said.

(Story has been updated to reflect modifications to the NOL deduction made after the original version of the Senate bill was published).

To contact the reporter on this story: Allyson Versprille in Washington at

To contact the editor responsible for this story: Meg Shreve at

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