It's not just the ultra rich, as well as a dazed and confused Bob Corker who is set to reap a $1+ million windfall from the passage of a tax bill which he opposed until just days ago, who will benefit from the passage of tax reform: according to Goldman Sachs among the biggest beneficiaries from the GOP tax cuts are, drumroll, the big banks. In an analysis from Goldman's Richard Ramsden, the FDIC-insured hedge fund writes that based on its "preliminary analysis of the current tax bill under consideration by Congress, our EPS estimates for our coverage would increase by 13% on average if the US statutory rate were to be reduced to the proposed 21%, all else being equal."
proposed tax changes (e.g., the base erosion tax, the DTA and deemed repatriation), as well as the prospect of the bill itself changing from the current proposal.
This is shown in the table below:
Goldman also lists three other key considerations: "in our view, are the deferred tax asset write down, deemed repatriation of foreign cash, and the base erosion provision. We note that these numbers are preliminary, for illustrative purposes and acknowledge that a range of outcomes may exist outside what we present, given the lack of granularity in public filings around a number of these proposed tax changes (e.g., the base erosion tax, the DTA and deemed repatriation), as well as the prospect of the bill itself changing from the current proposal."
Some more details on the tax benefit:
Statutory tax rate reduction: We estimate that the proposed statutory tax rate reduction from 35% to 21% could lead to 14% upside on average to our 2018 earnings estimates. In our analysis, we reduce the value of certain items that currently reduce banks’ statutory tax rates below 35% (i.e., tax exempt income, life insurance and tax credits) by the amount that the statutory tax rate falls.
We also expect that in the longer term, some of the benefit of tax reform could be competed away given banks price their business on an after-tax ROA. BBT recently mentioned 1/3 of the benefit would be reinvested into business lines, although we expect that this process would play out over a number of years.
We also expect deferred tax asset (DTA) write-downs and a capital impact from repatriating cash held abroad, although these adjustments are one-time in nature. Overall, we expect a 10bps increase on average to CET1 as most of our banks have a net DTL position, though certain banks, such as C and BAC, could see an outsized negative impact given their large net DTA position.
Finally, we note that there could be offsets from other adjustments to the tax code, including base erosion. There is concern this could adversely impact certain transactions between banks’ domestic and foreign affiliates. Additionally, under the current CCAR test, NOLs created by losses during the test can be carried back to prior years, benefitting the current tax rate. The current proposal would limit the ability for companies to carry back NOLs, which could lead to a reduction in stressed capital in the CCAR test, unless the Fed ultimately adjusts for this.
Finally, Goldman summarizes which banks are the biggest winners from tax reform. We doubt it is a coincidence that Warren Buffett's favorite bank, Wells Fargo, is at the top of the list. Of course, with Goldman doing the analysis and therefore exempt from the results, we are confident that the bank that actually wrote Trump's tax reform will do quite well itself.