Bank Tax Rate Slips as Outlook Improves

The financial crisis has cast a long shadow, but there may be an upside for banks: an extended period of low effective tax rates.

After gyrating wildly in 2008 and 2009, income tax expenses have sunk to a range of roughly 30 percent to 32 percent of trailing-four-quarter pretax net income across the industry in recent periods, down from a range of roughly 32 percent to 33 percent in the years leading up to the recession, according to data from the Federal Deposit Insurance Corp.

One possible explanation is the recovery of assets representing prior losses that can be used to reduce amounts due to the Internal Revenue Service. These assets had been written down when it appeared that some banks might not earn enough to make use of them. Companies like Taylor Capital Group already have restored their deferred tax assets after returning to profitability. Taylor recorded income tax expenses of negative $73 million in 2011 because of the recapture. Others have yet to reverse writedowns. Synovus Financial had an $800 million allowance against its deferred tax assets as of the first quarter.

Despite relatively strong earnings, deferred tax assets increased $4 billion in the first quarter across the industry, according to SNL Financial data, suggesting broad reversals of allowances. To be sure, recoveries of deferred tax assets are only the mirror image of tax expenses that were inflated when allowances were established in the first place, not a new tax break. Still, they are a sign that the industry is regaining its balance.