What We Learned in Wall Street Results: Tax Wins, Trading Losses

(Bloomberg) -- Wall Street banks are facing some stubborn problems heading into 2018 -- but rising profits won’t be among them.

That was the main takeaway as Morgan Stanley wrapped up Wall Street’s fourth-quarter earnings season Thursday, joining peers in announcing bad news about fixed-income trading and good news about the impact of tax cuts.

The firm said the U.S. overhaul would cut its effective tax rate this year to as low as 22 percent, not counting one-time items, from 31 percent in 2017. The rate at JPMorgan Chase & Co. and Wells Fargo & Co. will be even lower than that, based on those firms’ estimates. In bond trading, Goldman Sachs Group Inc. reported the steepest decline as an industrywide downturn dragged on.

Here are the key takeaways from the industry’s results:

Taxes

Investors largely ignored giant one-time charges resulting from the tax overhaul, as those figures had been telegraphed in advance. Lower effective tax rates were of more interest, because they mean bigger after-tax profits and more money that can be returned to shareholders or invested in the business.

Bank of America Corp., which posted a $2.9 billion charge, said its effective rate would go down to 20 percent in 2018, almost 9 percentage points below its average for the past three years.

Bond Trading

The entire year was a bust for the fixed-income market, and for some firms, like Goldman Sachs, the fourth quarter dealt an especially hard blow. Low volatility and historically low interest rates, even after small hikes by the Federal Reserve last year, are to blame. Some executives said they’ve seen signs of improvement during the early weeks of 2018.

Steinhoff Losses

Most of the biggest U.S. banks were caught in an accounting scandal at Steinhoff International Holdings NV, with only Morgan Stanley escaping unscathed. The others all made loans to the South African retailer, mostly on margin, that had to be written down when the company’s market value dropped by 90 percent and it struggled to survive as a going concern.

Citigroup Inc. led that list with about $370 million in losses and charge-offs.

Disappearing Jobs

Tax cuts don’t appear to be a salve for bankers’ job security. Although firms have hired in recent quarters, they continue to reduce overall staff as pressure to cut costs continues -- especially in a slower trading environment with narrower interest margins. The collective cuts by the six biggest firms last quarter were the largest since the fourth quarter of 2015.

Investment Banking

Advising on mergers and underwriting stocks and bonds offered another bright spot for the quarter. Investment-banking revenue jumped 19 percent to the highest in more than two years, and executives said they’re optimistic about bigger deal flows thanks to corporate tax cuts. Goldman Sachs Chief Financial Officer Martin Chavez said passage of the tax bill eliminated some uncertainty for companies, and bank’s “level of dialogue with clients has increased across a range of strategic and financial issues.” 

JPMorgan CFO Marianne Lake said improved clarity would give corporate customers “confidence to act.” And JPMorgan Chief Executive Officer Jamie Dimon said the U.S. had become more competitive because of the tax reductions, which he said will show up in higher economic and capital-markets activity.

“It’s a very good thing,” Dimon said last week on a call with analysts. “You’ve seen it with corporations; you’ve seen it with sentiment; you’ve seen it with people’s plans.”

Wells Fargo CFO John Shrewsberry said he expects firms to spend more on capital expenditures in 2018 because of the tax changes, adding that some deals may be easier to complete with lower tax rates.

--With assistance from Laura J. Keller

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net.

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Steve Dickson, David Scheer

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