If you think that Bank executives are geniuses in financial management, then you are correct. This is because they can make loss after loss after loss and still claim exorbitant wages and pay out their top executives millions of dollars a year while the shareholders take a big hit. However, this is not the case this time, while shareholders might take a momentary hit, the future of US banking is rosy pink.
Trump’s recent tax reform took many banks by surprise when they should have already been aware of the effect it would have and take corrective action. Interestingly enough, it is Warren Buffet who stated quite correctly that most mistakes are made based on a true premise rather than a false one. Most banks continue to base their operations on the premise that tax changes occur rarely and when they do, do not affect them due to pre-knowledge preparations. Deutsche bank reported a warning of a third annual loss due to a €1.5bn hit from Trump’s tax reforms combined with a decline of 22% in their trading and financing revenues. This led Deutsche Bank to report a loss for 2017 rather than a €1.3bn profit. The warning caused 4% dip in Deutsche Bank’s stock value, but we expect them to shrug that off quite quickly. After all, investors live on the premise that financial giants don’t fall, forgetting the past is mandatory when maintaining a balloon economy.
Deutsche added that part of its loss was due to the failure of it’s Polish subsidiaries that provided a €500m dent in their income for 2017. They also claim that revenues from trading and finance fell by 22%, which can either point to incapable traders or a drop-in client’s financial viability. They also stated that they had litigation and restructuring costs in 2017 that hampers the results.
Morgan Stanley also warned of a fourth-quarter wakening due to the tax reforms and they posted a $1.25bn which is a product of their deferred tax assets (DTAs) being devalued against their future tax bills due to the new tax code. However, Morgan Stanley did not blame corporate changes and issues for their reported losses. They directly blamed the Tax reforms for the immediate $1.25 net hit, but, this is a momentary glance. The tax reform is adjusting the tax rate from the low 30 range to low 20’s range, and in the long run, this 33% reduction in tax points will make a much greater payout in the future.
The new tax reform will pave the way for larger shareholder payouts and larger executive wages and bonus packages, as well as utilize charitable work for an extra tax deduction.
Here are a few of the listed devalued DTA hits:
• Bank of America: $3bn
• Citigroup $20bn
• Goldman $5bn
• Morgan Stanley $1.25bn
• Deutsche Bank €1.5bn
While the first quarter earnings begin on January 12th, everybody expects that 2017’s earnings will provide mixed results due to the initial effect of the tax bill, so no one is truly concerned by the reports. What investors are looking for are how Banks will address the future in relation to the tax reforms. The new tax reform allows for a “deemed repatriation” in which earnings will be taxed at 15.5% when held in liquid securities or cash and the rest would be taxed at 8%. This money could then be returned to the US at no extra cost. Bottom line, 2018 will be an excellent year for US banks .