The U.S. tax overhaul cost JPMorgan Chase $2.4 billion last year. Consider it a down payment on a more profitable future.
The bank said that while it took accounting charges in the fourth quarter tied mostly to levies on foreign earnings required under the new law, its effective tax rate will drop this year to 19% from 32%. That means that if JPMorgan generates the same pretax profit this year as it did in 2017, earnings will balloon by more than $3.5 billion. (Its full-year earnings for 2017 were $24.4 billion.)
Discussion about the ramifications of the tax changes is likely to dominate earnings season. Chief Financial Officer Marianne Lake has said that some of those gains will probably evaporate as banks compete with one another on pricing and services.
“The enactment of tax reform in the fourth quarter is a significant positive outcome for the country,” Chief Executive Officer Jamie Dimon said in a news release Friday, adding the bank will boost investments due to the changes. “U.S. companies will be more competitive globally, which will ultimately benefit all Americans.”
JPMorgan’s fourth-quarter charge was largely driven by unremitted overseas earnings facing taxation under the Republican tax overhaul. Citigroup has said it will face a hit of as much as $20 billion, largely from a writedown of deferred tax assets, and other U.S. banks have disclosed one-time charges in the billions.
The tax changes affected the firm’s trading results as revenue fell 26% to $3.37 billion from a year earlier. Fixed-income revenue dropped 34% to $2.22 billion — more than $500 million lower than analysts’ estimates for that business — fueled by placid markets, tighter credit spreads and the tax charge.
Equity-trading revenue was little changed from a year earlier at $1.15 billion, affected by a $143 million loss on a margin loan. The loss was tied to South African retailer Steinhoff International Holdings NV, according to a person with knowledge of the transaction. Excluding the one-time charges, the decline in overall trading revenue was 17%, slightly worse than Lake’s guidance from December.
Here’s a summary of JPMorgan’s fourth-quarter results:
- Net income dropped 37% to $4.23 billion, or $1.07 a share, from $6.73 billion, or $1.71, a year earlier. Adjusted earnings per share were $1.76, the company said, beating the $1.69 average estimate of 16 analysts surveyed by Bloomberg. Excluding the impact of the tax changes, net income would have been $6.7 billion.
- Provisions for loan losses increased 51% from a year earlier to $1.31 billion, lower than the $1.48 billion analysts predicted. Net revenue rose 5% to $25.5 billion, while noninterest expenses climbed by a similar percentage to $14.6 billion, driven largely by higher compensation costs and auto lease depreciations.
- Profit in its commercial bank surged 39% to $957 million, helped by higher revenue from deposit spreads and loan growth, as well as a $115 million benefit tied to the tax changes.
- Wealth management profit climbed 12% to $654 million on rising markets and increasing interest income on deposits and loans.
- Earnings from consumer banking increased 11% to $2.6 billion on higher deposit margins.
- Net interest margin, the difference between what a bank pays depositors and charges borrowers, climbed 5 basis points to 2.42% from the previous quarter, exceeding analysts’ 2.39% estimate.
- Interest income rose 11% from a year earlier to $13.35 billion, exceeding estimates.