Tax reform gut punch: Banks’ 4Q profits take a beating
The tax reform law passed late last year, which significantly cut the corporate tax rate, has been widely popular among banks, but a one-time hit to the value of their deferred tax assets was felt far and wide.
The Federal Deposit Insurance Corp. said Tuesday in the Quarterly Banking Profile that net income fell nearly 41% in the fourth quarter from a year earlier because of the tax law. The repatriation of income from foreign subsidiaries also had a negative effect.
However, the industry also had much to be pleased about in the quarter, including better loan growth, a higher net interest margin, fewer "problem banks" and continued growth in the Deposit Insurance Fund.
"Notwithstanding the one-time impact of the new tax law, the overall performance of the industry continued to be positive," said FDIC Chairman Martin Gruenberg.
"Community banks also were affected by the new tax law in the fourth quarter, primarily from the one-time revaluation of deferred tax assets," Gruenberg added. "However, net interest income was up significantly at community banks, as net interest margins improved and their loan growth outpaced that of the overall industry."
The average net interest margin rose to 3.31% in the quarter, a 15-basis-point increase from a year earlier. It was the highest quarterly net interest margin since late 2012. Yet there were some other hits that banks took to earnings besides the tax reform law. Banks set aside 8.9% more in their loan-loss provisions from a year earlier. Provisions totaled $13.6 billion in the quarter.
"More than one in three (38.9 percent) institutions reported higher loan-loss provisions than in fourth quarter 2016," the agency said.
And banks also charged off $1 billion more in delinquent loans during the fourth quarter. Net charge-offs rose 8.6% from a year earlier, to $13.2 billion.
"This marks a ninth consecutive quarter that net charge-offs increased," the FDIC report said.
Here are some takeaways from the FDIC's fourth-quarter report: