When it comes to taxes, the formula gets a little trickier for banks. Questions over interest and expense deductibility, how much the plans would impact loan growth and some other nuances make the math harder to calculate.
However, large banks likely would see 2018 earnings per share jump by 12 to 20 percent, while midcaps would see growth of 15 to 25 percent, according to Kevin St. Pierre, senior analyst at AB Bernstein.
“The banks with higher effective tax rates would likely be the biggest beneficiaries, but it remains to be seen how tax credits are handled and what the impact would be on banks paying below-average tax rates today,” St. Pierre said in a note.
“Details on the suggested shift to a territorial regime (vs. worldwide today) also need to be ironed out — and it’s tough to know how this would affect overall tax rates for banks with sizeable foreign exposure,” he added.
The territorial part of the plan would see a one-time tax levied on companies’ profits stashed overseas, a total estimated at $2.5 trillion, in an effort to get that cash repatriated back home. The effective tax rate, which is what companies actually pay after deductions, is also a critical part of determining benefit.
Banks’ effective tax rates range from 25 to 35 percent, so the ones at the higher end of the tax scale would receive more benefit. The rate varies significantly on banks in St. Pierre’s coverage universe:
“Some banks (HBAN, FITB, PNC, KEY) operate close to ~25% effective tax rates today,” St. Pierre wrote. “One reason for their lower effective tax rates is that they leverage on the tax credits and tax-exempt income that the tax code currently offers.
“With the reform framework relaying a special emphasis on retaining the low-income housing tax credits, we believe banks could retain some of their tax credit benefits, and potentially run at effective tax rates below the headline 20%.”
He also points out that the effective tax rate for the entire S&P 500 is 26 percent, and estimates that the index would see an 8 percent earnings gain.
Relative to other sectors, then, the gain for large-cap banks would be in the 4 to 12 percent range while small-caps would see a benefit of 7 to 17 percent.
Bank stocks took off after Trump’s election on hopes both for tax reform and less regulation. However, the sector, as measured by the SPDR S&P Bank ETF, has surged nearly 13 percent since hitting its 2017 low Sept. 7. The ETF is up 3.3 percent year to date, lagging the S&P 500’s 13.4 percent gain.
Correction: The White House’s current proposal calls for lowering the corporate rate from 35 percent to 25 percent. An earlier version misstated the rate.
WATCH: One Wall Street strategist explains why investors are getting more optimistic about tax reform.