Bank of America subtracted $2.9 billion from its profit at the end of 2017, joining two of its biggest rivals in taking an early hit from a Republican tax overhaul designed to give corporations a break.
The charge, which lowered fourth-quarter earnings by 27 cents a share, included a $1.9 billion markdown of the value of tax deductions from operating losses in previous years that the Charlotte, N.C.-based lender is allowed to claim later.
Those have a lower value under the 21 percent top corporate tax rate set by the new tax law than under the 35 percent levy in effect previously, though some of the tax the company owed from previous years was also reduced. That provision of the law, which also curbed earnings at JPMorgan Chase and Citigroup, helped drag Bank of America’s net income down 50 percent to $2.08 billion. CFO Paul Donofrio declined to provide specifics on how the charge was calculated.
Despite the initial costs, however, executives have been optimistic that the tax overhaul signed into law by President Trump will deliver the promised benefits. Donofrio was no exception.
Two fundamental drivers will bolster the bank’s performance, he said Wednesday. First, the lower effective tax rate will offer significant savings to the company’s largest customers, giving them more money to invest.
Second, the tax act “levels the playing field for America because an important barrier to investing in the U.S. relative to other jurisdictions has been reduced,” he said. “As one of the largest banks in America, we benefit.”
Because of the change, Bank of America’s effective tax rate will likely be 20 percent in 2018, down from an expected 29 percent previously. Many of the benefits from that will fall to the bottom line, enabling the bank to return more to shareholders through dividends and stock buybacks, said CEO Brian Moynihan.
Indeed, the lender may raise its dividend as much as 40 percent this year if the Federal Reserve approves following annual stress tests, said Kenneth Leon, an analyst with CFRA Research. That would take the quarterly payout to about 16 cents a share, the highest since it was cut to a penny after former CEO Kenneth Lewis’s purchases of troubled lender Countrywide Financial and investment bank Merrill Lynch during the financial crisis.
“We see Bank of America as a beneficiary of a strong U.S. economy, rising rates, increased loan growth and capital markets that should see higher investment banking,” Leon wrote in a note to clients.
Excluding the tax charge, Bank of America’s profit of 47 cents a share topped the 45-cent average from analysts surveyed by FactSet. Total revenue rose 2 percent to $20.4 billion, reflecting increased lending to customers at higher interest as the Federal Reserve raised rates.
Such gains were curbed, however, by a revenue decline in the markets division. Fixed income trading fell 14 percent to $1.6 billion amid lower volatility than the previous year, when investors were energized by Britain’s departure from the European Union and Trump’s victory in the U.S. presidential campaign.
Bank of America fell 2.3 percent to $30.52 in New York trading on Wednesday morning, paring gains this year to 3.4 percent. That lags behind the S&P 500’s climb in the same period.
