The Tax Cuts and Jobs Act was enacted in December 2017 and represented the most significant legislative achievement by the Trump administration thus far. The tax reform package slashed the corporate tax rate from 35% to 21%. The initiative also saw widespread support in the corporate world, with U.S. banks expected to take advantage of the massive windfall in 2018 and beyond.
Earnings season kicked off in mid-April for U.S. banks, and the results did not disappoint. The combined earnings of the four major national banks – Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc., and Wells Fargo & Co. – climbed by $2.5 billion in the first quarter of fiscal 2018, representing the highest quarterly profits since 2007. Taken together with Goldman Sachs Group Inc. and Morgan Stanley, the savings reached $3.59 billion.
The tax savings represents roughly 10% of total first-quarter earnings, but the windfall has been a massive boost for year-over-year growth. The banks were also due for a boost after sustaining costs from the one-tax tax charge in the fourth quarter for overseas holdings. A banking deregulation bill could also be on tap in 2018 — a bill that aims to exempt medium-sized banks from Dodd-Frank legislation (Dodd-Frank Wall Street Reform and Consumer Protection Act).
Several Canadian banks have sizable footprints south of the border, and should also receive a boost from U.S. tax reform going forward. Let’s focus on two of them today.
Toronto-Dominion Bank (TSX:TD)(NYSE:TD)
TD Bank is set to release its 2018 second quarter results in late May. It boasts the largest U.S. footprint of any Canadian bank and should still be considered a top target given its favourable pricing following a steep drop in late March. TD Bank stock was up 3.9% week over week as of early afternoon trading on April 26, as investors have seemingly jumped on the mid-April bargain pricing.
TD Bank incurred a $405 million one-time tax charge due to U.S. tax reform in the first quarter of 2018. TD Bank’s adjusted net income in its U.S. Retail banking segment rose to $1.02 billion, representing a 19% increase year over year. TD posted solid loan growth in the first quarter. Bank of America, JPMorgan, and Citigroup all posted an increase in net interest income that was boosted by higher interest rates, as well as positive loan growth.
The bank also offers an attractive quarterly dividend of $0.67 per share, representing a 3.4% dividend yield.
Bank of Montreal (TSX:BMO)(NYSE:BMO)
Bank of Montreal has also seen its stock gather momentum in late April. Shares are down over 3% year over year but its U.S. banking segment should provide a boon in 2018. The bank also offers a quarterly dividend of $0.93 per share representing a 3.7% dividend yield.
In the first quarter, BMO reported a $425 million charge due to the revaluation of its U.S. net deferred tax asset. This drove down net income growth by 29%, or $0.65 earnings per share. Like its U.S. counterparts, BMO should also see positives in the long-term from tax reform and a boost to earnings that will make up for its Q1 loss. BMO reported a 23% increase year-over-year to $321 million in adjusted net income for its U.S. Personal and Commercial banking segment.
