Without Tax-Cut Boom, Banks Would Be Facing a Bust

(Bloomberg Opinion) -- Here’s the latest sign of who’s benefiting in President Donald Trump’s economy: Without the tax cut, bank earnings growth in the second quarter would have been pretty close to zilch. Instead, the nation’s six biggest banks are set to report a 14 percent improvement in earnings in the April-to-June period. Nine of every 10 dollars of that increase is thanks to the tax cut. Just one dollar came from an actual improvement in operations.

That small gain, just $413 million out of an estimated $3.5 billion increase, is odd given how strong the economy appears to be. Just last year, investors seemed certain that a mixture of Trump’s deregulation and then proposed tax cuts would boost corporate America and banks in particular. And yet those tax gains haven’t translated into much more business for the banks. 

Without Tax-Cut Boom, Banks Would Be Facing a Bust

The latest evidence came on Monday when Bank of America Corp. reported a 33 percent increase in second-quarter profit to $6.8 billion. The increase was stronger than expected and cheered by investors. Still, 86 percent of that profit increase came from a lower tax rate, which dropped to 20 percent for the bank in the quarter. Exclude that, and Bank of America’s earnings would have risen just 4.6 percent. Bank of America said its consumer lending business was strong. Overall revenue, though, rose just 3 percent.

Wells Fargo & Co., too, would have had a much worse quarter had it not been for the tax cuts. The bank’s profits fell by $527 million in the second three months of the year. Without its tax savings, though, which were an estimated $162 million in the quarter, earnings would have dropped by nearly $700 million.

Without Tax-Cut Boom, Banks Would Be Facing a Bust

Four of the big banks have already reported their earnings, with two more banks — Goldman Sachs Group Inc. and Morgan Stanley —releasing results on Tuesday and Wednesday, respectively. Morgan Stanley’s earnings after adjusting for its tax rate, which is expected to drop to 24 percent, are anticipated to be flat from a year ago. About half of Goldman’s estimated $170 million increase in quarterly profits is expected to come from tax savings.

Investors have been more skeptical of how much boost the tax cuts would provide to the economy this year, and the big banks’ second-quarter profits seem to suggest why. The fear still seems to be that tariffs and a growing trade war could wipe away whatever economic gains will come from the tax cuts. But if second-quarter profits for the entire market shake out similarly to how they have for the banks, there could be growing concern that the tax-cut turbocharger was overhyped to begin with. 

Stephen Gandel is a Bloomberg Opinion columnist covering banking and equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

©2018 Bloomberg L.P.