KeyCorp., South Financial Group Inc., Citigroup Inc. and other banks are likely to benefit if the incoming Obama administration sweetens tax refunds for banking companies operating in the red, analysts said.
In coming weeks, many banks of various sizes are expected to post losses for 2008, and analysts say it is unclear that these banks will return to profitability in 2009. The Obama proposal would allow such companies to use losses suffered in either or both years to reduce taxes paid on profits going back five years, extending a benefit that currently goes back two years.
Key of Cleveland, South Financial, in Greenville, S.C., and Citi of New York are all expected to post losses for 2008, which analysts believe would give them an opportunity to seek refunds under the current two-year structure. And with the prospect of more losses in coming quarters for the industry as a whole, it is very likely that a number of companies would benefit from the five-year structure. The proposal, which is still under consideration, would also allow companies to offset tax liabilities for future earnings.
"The tax rule may be most relevant to those companies reporting large credit-related losses in 2009," said Adam Barkstrom, an analyst at Sterne Agee & Leach Co. "It may give them another incentive to clean up their portfolios faster."
Daniel Cardenas, the director of research at Howe Barnes Hoefer & Arnett Inc., said, "I don't want to paint the whole sector as one that would need this, but there will be banks that would certainly benefit."
Frank Barkocy, the director of research at Mendon Capital Advisors, said Citi and Key will report 2008 losses and may not dig their way back into the black this year. "And there are a number of regional banks that are having problems and are on the edge of profitability," he said.
Mr. Barkstrom said Colonial BancGroup Inc. in Montgomery, Ala., South Financial, and Synovus Financial Corp. in Columbus, Ga., are likely to have losses through this year.
"Would this be looked at as more than a little noise? It's hard to say," said Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP. He listed First Horizon National Corp. in Memphis, Superior Bancorp in Birmingham, Ala., and United Community Banks Inc. in Blairsville, Ga., as possible beneficiaries.
"These are all banks that have substantial parts of the portfolio that need to be written down," he said.
Tax losses for banks for 2008 and this year could outweigh taxable profits from the previous two years. But if banks can go back five years, they could more fully tap into the tax benefits, proponents of the proposal say. For example, if a company lost $5 billion last year and a similar amount this year, it could conceivably claim back taxes paid on the same amount of profit in prior profitable years.
Citi's expected $11.05 billion loss for 2008, versus a 2007 loss of $3.62 billion, would cut deeply into its $21.54 billion gain in 2006, according to Thomson Reuters. Key and South Financial are also expected to report losing more in 2008 than they earned in 2007.
Losses for 2008 at Colonial, United Community, and Superior could equal to 50% or more of their gains in 2007, according to the same data. Synovus' estimated losses for last year would be about 17% of its gains a year earlier. First Horizon posted a loss for 2007.
Rex Schuette, the chief financial officer at United Community, said he believes the company should be fine with the current two-year period though having a longer timeframe would "provide flexibility if issues are prolonged well into 2009."
Each company other than United Community either declined to comment or did not respond to interview requests. Observers said the plan also could encourage acquisitions, depending on how any deals might be structured. They said it could resurrect two-party transactions where a target is merged directly into an acquirer, since doing so allows a buyer to apply the target's losses to its own prior-year profits.
Barry Taff, the head of mergers and acquisitions at Silver, Freedman & Taff LLP, said three-party structures, where the buyer creates a unit to absorb the target, insulate "the acquirer from liabilities such as litigation and other claims" against the seller, protecting "the mother ship."
But "the effective cost of the deal becomes much smaller when you factor in the potential for tax refunds," said Robert Willens, a corporate taxation expert in New York. "You hardly see two-party mergers anymore … but doing so opens up the ability to carry post-merger losses over to the pre-merger company."
The practice made a bit of a comeback recently, with Wells Fargo & Co. reviving it for its Dec. 31 purchase of Wachovia Corp. and PNC Financial Services Group Inc. doing the same for its acquisition of National City Corp. Observers said they believe the two-party structures were used in expectation that such a tax change would occur. Spokesmen for Wells and PNC declined to comment.