SO THIS is how normality feels. Between April 13th and April 18th America’s biggest banks reported a strong set of first-quarter earnings, with a helping hand from the taxman. Some are more profitable than they have been for years. They are paying billions to shareholders; regulatory reins are being loosened. Yet the stockmarket shrugged. On April 18th the S&P 500 index of banks’ share prices was 4.1% lower than at the start of reporting season.
Banks expected three main effects from the corporate-tax cut signed into law by President Donald Trump in December. The first was a write-down of deferred tax assets—past losses that could be set against future bills—which clobbered most lenders’ bottom lines in the fourth quarter but did no real damage. (Some, including Wells Fargo, carried deferred liabilities and hence recorded a gain.) The second was a permanent reduction in their tax bills. The third was a boost to business from a more lightly taxed America Inc.
The direct benefits of lower taxes are plain. Although pre-tax profits at the six biggest banks rose by $4.3bn, compared with the first quarter of 2017, taxes fell at five of them. (At the sixth, Goldman Sachs, the bill was unusually low a year ago because of a change in the treatment of employees’ shares and options.) Of a total increase in net profit of $5.4bn at those five, lower taxes accounted for $2.1bn. The ratio of tax to gross profit dropped by as much as nine percentage points (see chart).
Conclusive evidence on whether tax cuts will ginger up the whole economy will take longer to appear, although some bankers detect it already. Even so, the strong showing indicated more than merely a stroke of the presidential pen. JPMorgan Chase, America’s biggest bank, would have claimed a record profit even without lower taxes. Higher interest rates pushed its net interest income (the gap between lending revenues and borrowing costs) up by $1.1bn, or 9%. As the Federal Reserve raises rates further, banks can expect more of that. Perky loan growth helped, too.
In investment banking, the brightest spot was in buying and selling shares. Choppier markets meant livelier trading after a quiet 2017. Revenues leapt by 38%, year on year, at Bank of America, Citigroup and Goldman Sachs and 25%-plus at JPMorgan Chase and Morgan Stanley. Trading of bonds, currencies and commodities was flatter—except at Goldman, where business rebounded by 23% after a poor start to last year. Revenues from advice and from underwriting new bond and share issues were mixed.
All this leaves America’s largest banks in rude health—the rudest, arguably, since the financial crisis a decade ago. The unweighted average return on equity for the biggest six in the first quarter was 13.1%. According to data from Bloomberg, it is at its highest since the crisis. Only Citigroup, at 9.7%, was below the 10% mark that investors regard as par. Bank of America cleared that hurdle for the first time in six and a half years. Goldman’s 15.4% was its best for five. Morgan Stanley’s 14.9% easily beat its self-effacing target.
Moreover, those returns are built on a much thicker equity base. The average ratio of common equity to risk-weighted assets, a key regulatory gauge of banks’ strength, is 12.5%, more than three times as high as at the end of 2007 (using an estimate by Autonomous Research). Lately, in fact, the ratio has declined slightly, as banks have returned money to shareholders and the Federal Reserve has felt confident enough to let them. Last June the Fed approved the big six’s plans to spend $72bn buying back shares over the next year, as well as increasing dividends.
The sky is not unblemished blue. Legal clouds linger over Wells Fargo, which may have to revise its earnings. Its net profit was the slowest-growing among the six. Regulators have offered to settle investigations of its sales of car insurance and some mortgages for $1bn. And a trade war would help no one. But big banks are once again getting used to sunshine.