James Dimon: The Tax Law Means More Profit for JPMorgan -- Update

JPMorgan Chase & Co. and Wells Fargo & Co. posted fourth-quarter earnings that were roiled by the recent tax overhaul but forecast the changes will bolster future profits and stoke the broader U.S. economy.

JPMorgan, the biggest U.S. bank by assets, said a $2.4 billion charge related to the recently enacted tax law caused its profit to fall 37% from a year earlier to $4.23 billion. Even so, Chief Executive James Dimon said the tax law enacted late last year was "a big, significant positive and much of it will fall to our bottom line in 2018 and beyond."

Other big banks, including Citigroup Inc. and Goldman Sachs Group Inc., have said the tax law will result in billions of dollars in one-time charges when they report fourth-quarter results next week. They, too, have said those hits will give way to substantial long-term gains.

That bodes well for banks, coming at a time when the economy is showing strength, unemployment remains low and interest rates are inching higher.

"The backdrop is set up well for these banks: higher interest rates, improving GDP growth that has to help loan growth," said Gary Bradshaw, a portfolio manager at Dallas-based Hodges Capital Management, which owns shares of Wells Fargo, Citigroup and Bank of America Corp.

At Wells Fargo, the immediate impact of the tax law was a gain due to shrinking tax liabilities, which boosted net income by about $3.35 billion.

PNC Financial Services Group Inc., which also reported earnings Friday, similarly cited a tax-related boost to net income due to the declining value of tax liabilities. CEO William Demchak said in an interview it will take time to see how the tax-code changes play out among customers and consumers, or if it ultimately spurs more borrowing.

But overall, "for all the investment decisions that companies make, the U.S. just got that much more attractive," Mr. Demchak said. "It's going to win more than it won before in terms of where people choose to do business activity and invest."

David James, director of research for Denver-based James Advantage Funds, said the tax-overhaul impact is "music to people's ears" and is hopeful higher profits will lead to increased dividends and buybacks at banks like JPMorgan. He cautioned, though, that investors will soon bake in boosts from the new tax law into banks' expectations.

"If this becomes the new normal it may become harder to impress the markets," said Mr. James, whose firm's James Balanced: Golden Rainbow Fund owns about $11.5 million of JPMorgan shares.

For JPMorgan, the one-time charge is related to changes in the value of the bank's deferred tax assets and the need to repatriate profits held overseas. Its corporate and investment bank, in particular, felt the blow.

Wells Fargo and PNC, on the other hand, had net deferred tax liabilities. The changes to the tax code caused them to write down that part of that liability -- taxes payable in the future -- which resulted in a gain that boosts reported results.

The varied effects of the tax law and the complexity it introduced into earnings masked differences in the underlying performance of JPMorgan and Wells Fargo.

JPMorgan's results were solid, led by a record profit in its commercial bank, which jumped 39% to $957 million from the year-earlier period. Profit in its consumer and community bank unit rose 11% to $2.63 billion from the fourth quarter of 2016.

But JPMorgan's corporate and investment banking unit was weighed down by weak trading, slumping 17% to $3.37 billion after stripping out the tax-overhaul impact. It also was hit with losses as high as $273 million related to client Steinhoff International Holdings NV, which is dealing with a wide-ranging accounting probe that is expected to also dig into other large banks' results.

Wells Fargo, meanwhile, continued to suffer from its regulatory headaches. While it gained from the tax changes, that was offset by $3.25 billion in new litigation charges. The bank said this was the result of "a variety of matters," including mortgage-related investigations, its sales-practices scandal and other consumer-banking issues.

The bank's loan portfolio shrank in the fourth quarter, the profitability of its lending activities declined and businesses like mortgage banking and investment banking contracted.

The bank hasn't incorporated much economic impact from the tax overhaul into its current forecast, but executives said they thought consumers would likely benefit.

"There have been millions of employed folks across the country that have gotten pay raises and bonuses and the like and I think that's a net positive for economic growth," Wells Fargo CEO Tim Sloan said on an analyst call.

JPMorgan's Mr. Dimon also was optimistic, noting the bank expects to have roughly $3.6 billion in additional net income as a result of the tax overhaul.

He cautioned that there are uncertainties ahead since many of the business-tax changes will require new regulations from the Treasury Department, and that has yet to happen. But the bank has ideas on how it can use the windfall.

JPMorgan finance chief Marianne Lake said the bank plans to "continue to lean into" investment opportunities such as its own bankers and offices, potential global expansion, digital capabilities and payments. JPMorgan's strategy on dividend increases and its repurchase programs "might be a bigger dollar number," too, she said.

More broadly, Ms. Lake said she expects small business and commercial banking will have new catalysts for spending because of the tax overhaul. "Already very good credit trends we think will be good for longer," she said.

The new tax code also could prompt greater competition for new business among banks.

"If the economy heats up because of tax reform and everybody's got higher loan growth, then somebody may very well begin to defend their deposit franchise in order to fund it," said John Shrewsberry, Wells Fargo's finance chief.

--Christina Rexrode contributed to this article.

Write to Emily Glazer at emily.glazer@wsj.com and Peter Rudegeair at Peter.Rudegeair@wsj.com

(END) Dow Jones Newswires

January 12, 2018 19:16 ET (00:16 GMT)