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James Dimon: The Tax Law Means More Profit for JPMorgan

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01/12/2018 | 10:05pm CEST
By Emily Glazer and Peter Rudegeair 

The tax-code overhaul roiled fourth-quarter results at JPMorgan Chase & Co. and Wells Fargo & Co., but executives said benefits from lower taxes should improve their profitability as soon as this year as well as the broader American economy.

JPMorgan, the biggest U.S. bank by assets, said a $2.4 billion charge related to the recently enacted tax law caused its profit to fall 37% from a year earlier to $4.23 billion. Even so, Chief Executive James Dimon said the tax law enacted late last year was "a big, significant positive and much of it will fall to our bottom line in 2018 and beyond."

Other big banks, including Citigroup Inc. and Goldman Sachs Group Inc., have said the tax law will result in billions of dollars in one-time charges when they report fourth-quarter results next week. They, too, have said those hits will give way to substantial long-term gains.

That bodes well for banks, coming at a time when the economy is showing strength, unemployment remains low and interest rates are inching higher.

"The backdrop is set up well for these banks: higher interest rates, improving GDP growth that has to help loan growth," said Gary Bradshaw, a portfolio manager at Dallas-based Hodges Capital Management, which owns shares of Wells Fargo, Citigroup and Bank of America Corp.

At Wells Fargo, the immediate impact of the tax law was a gain, boosting net income by about $3.35 billion. This was due to tax liabilities that shrank as the corporate tax rate is set to fall to 21% from 35%. Wells Fargo said it expects this year to have an effective tax rate of about 19%.

PNC Financial Services Group Inc., which also reported earnings Friday, similarly cited a tax-related boost to net income due to the declining value of tax liabilities. CEO William Demchak said in an interview it will take time to see how the tax-code changes play out among customers and consumers, or if it ultimately spurs more borrowing.

But, overall, "for all the investment decisions that companies make, the U.S. just got that much more attractive," Mr. Demchak said. "It's going to win more than it won before in terms of where people choose to do business activity and invest."

David James, director of research for Denver-based James Advantage Funds, said the tax-overhaul impact is "music to people's ears" and is hopeful higher profits will lead to increased dividends and buybacks at banks like JPMorgan.

He cautioned, though, that investors will soon bake in boosts from the new tax law into banks' expectations. "If this becomes the new normal it may become harder to impress the markets," said Mr. James, whose firm's James Balanced: Golden Rainbow Fund owns about $11.5 million of JPMorgan shares.

The varied effects of the tax-code changes on different banks made fourth-quarter results something of a muddle for investors.

For JPMorgan, the one-time charge is related to changes in the value of the bank's deferred tax assets and the need to repatriate profits held overseas. Its corporate and investment bank, in particular, felt the blow.

Wells Fargo and PNC, on the other hand, had net deferred tax liabilities. The changes to the tax code caused them to write down that part of that liability -- taxes payable in the future -- which resulted in a gain that boosts reported results.

The tax headlines also masked differences in the underlying performance of JPMorgan and Wells Fargo.

JPMorgan's results were solid, led by a record profit in its commercial bank, which jumped 39% to $957 million from the year-earlier period. Profit in its consumer and community bank unit rose 11% to $2.63 billion from the fourth quarter of 2016.

But JPMorgan's corporate and investment banking unit was weighed down by weak trading, slumping 17% to $3.37 billion after stripping out the tax-overhaul impact. It also was hit with losses as high as to $273 million related to client Steinhoff International Holdings NV, which is dealing with a wide-ranging accounting probe that is expected to also dig into other large banks' results.

Wells Fargo, meanwhile, continued to suffer from its regulatory headaches. While it gained from the tax changes, that was offset by $3.25 billion in new litigation charges. The bank said this was the result of "a variety of matters," including mortgage-related investigations, its sales-practices scandal and other consumer-banking issues.

The bank's loan portfolio shrank in the fourth quarter, the profitability of its lending activities declined and businesses like mortgage banking and investment banking contracted.

The bank hasn't incorporated much economic impact from the tax overhaul into its current forecast, but executives said they thought consumers would likely benefit.

"There have been millions of employed folks across the country that have gotten pay raises and bonuses and the like and I think that's a net positive for economic growth," Wells Fargo CEO Tim Sloan said on an analyst call.

JPMorgan's Mr. Dimon also was optimistic, noting the bank expects to have roughly $3.6 billion in additional net income as a result of the tax overhaul.

He did caution that there are uncertainties ahead since many of the business-tax changes will require new regulations from the Treasury Department, and that has yet to happen. But the bank has ideas on how it can use the windfall.

JPMorgan finance chief Marianne Lake said the bank plans to "continue to lean into" investment opportunities such as its own bankers and offices, potential global expansion, digital capabilities and payments. JPMorgan's strategy on dividend increases and its repurchase programs "might be a bigger dollar number," too, she said.

More broadly, Ms. Lake said she expects small business and commercial banking will have new catalysts for spending because of the tax overhaul.

"Already very good credit trends we think will be good for longer," she said.

The new tax code also could prompt greater competition for new business among banks. "If the economy heats up because of tax reform and everybody's got higher loan growth, then somebody may very well begin to defend their deposit franchise in order to fund it," said John Shrewsberry, Wells Fargo's finance chief.

--Christina Rexrode contributed to this article.

Stocks mentioned in the article
ChangeLast1st jan.
CITIGROUP -0.40% 70 Delayed Quote.-5.93%
GOLDMAN SACHS GROUP -0.87% 251.96 Delayed Quote.-0.23%
PNC FINANCIAL SERVICES GROUP -0.10% 144.12 Delayed Quote.-0.02%
WELLS FARGO 1.98% 52.56 Delayed Quote.-13.37%
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Financials ($)
Sales 2018 110 B
EBIT 2018 45 473 M
Net income 2018 30 658 M
Debt 2018 -
Yield 2018 2,24%
P/E ratio 2018 12,38
P/E ratio 2019 11,42
Capi. / Sales 2018 3,45x
Capi. / Sales 2019 3,31x
Capitalization 380 B
Duration : Period :
JP Morgan Chase & Company Technical Analysis Chart | JPM | US46625H1005 | 4-Traders
Technical analysis trends JP MORGAN CHASE & COMPANY
Short TermMid-TermLong Term
Income Statement Evolution
Mean consensus OUTPERFORM
Number of Analysts 31
Average target price 120 $
Spread / Average Target 7,9%
EPS Revisions
James Dimon Chairman & Chief Executive Officer
Gordon A. Smith Co-President & Co-Chief Operating Officer
Daniel E. Pinto Co-President & Co-Chief Operating Officer
Marianne Lake Chief Financial Officer & Executive Vice President
Lori A. Beer Chief Information Officer
Sector and Competitors
1st jan.Capitalization (M$)
BANK OF AMERICA2.24%309 974
WELLS FARGO-13.37%256 287
HSBC HOLDINGS-8.57%198 513