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Jan 12, 2018

JPMorgan says tax changes will spur more profits after quarterly beat

McCreath: Banks don't benefit equally from rising interest rates

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JPMorgan Chase & Co (JPM.N) beat Wall Street's fourth-quarter earnings expectations on Friday and said tax law changes will help future profits by not only reducing the amount it pays the federal government but also by stimulating more business.

JPMorgan, the biggest U.S. bank by assets, recorded US$2.4 billion in one-time charges in the fourth quarter related to the tax law changes. However, it expects its effective tax rate to drop to 19 per cent this year from 32 per cent last year, which could save it billions of dollars.

The sweeping tax changes President Donald Trump signed into law in December, designed to kick-start economic growth, slashed the corporate rate to 21 per cent from 35 per cent.

As a result, JPMorgan said it expects corporations to borrow more, offer more stock and pursue more mergers and acquisitions, all of which would boost JPMorgan's revenue.

"It is a really strong positive for the economy, the country and for our clients generally and so we are very optimistic," Chief Financial Officer Marianne Lake said on a call with reporters.

The bank's shareholders should also see benefits as the tax changes will enable JPMorgan to return more capital to them, Lake said.

"All things being equal there is definitely the opportunity to consider dividends and repurchases as we go through 2018," she said.

Several financial companies, including Citigroup Inc (C.N) and Morgan Stanley (MS.N), have warned investors that they will face short-term pain over some of the tax changes. However, over the longer term, the changes are widely expected to generate gains for large U.S. corporations.

JPMorgan's charges related to a one-time repatriation tax on income it has kept abroad and adjusting the value of its deferred tax assets and liabilities. The bank said it does not expect to bring any substantive amount of the foreign cash home, because it has capital and liquidity requirements abroad.

Excluding one-time items, JPMorgan's fourth-quarter profit was higher than analysts had expected. Rising interest rates produced gains in net interest income that offset a slowdown in trading revenue.

Its adjusted net profit was US$6.7 billion, or US$1.76 per share, compared with the average estimate of $1.69 per share. Net revenue rose 4.6 per cent to US$25.45 billion and beat the estimate of US$25.15 billion. Including the tax charge, its net profit fell to US$4.23 billion, or US$1.07 per share, from US$6.73 billion, or US$1.71 per share, a year earlier.

Trading revenue across the industry has been under pressure due to low volatility. Markets were especially active in the year-earlier quarter as investors changed positions around the U.S. election.

JPMorgan's bond trading revenue fell 27 per cent, while equity trading revenue was flat, and included a mark-to-market loss of $143 million on a margin loan.

The loss stemmed from a syndicated loan to troubled South African retailer Steinhoff International, Lake said on the call.

Other banks with substantial lending exposure to Steinhoff include Commerzbank (CBKG.DE), UniCredit (CRDI.MI), Calyon, BNP (BNPP.PA), HSBC (HSBA.L), Citigroup Inc (C.N), Mizuho and Bank of America Corp (BAC.N).

Rising interest rates helped JPMorgan cushion the blow from lower trading revenue, lifting net interest income by 11 per cent to $13.4 billion.

JPMorgan's shares were up slightly at $110.84 in light premarket trading.