Court Decision May Spell New Trouble for Banks

Bank of New York Mellon (NYSE: BK  ) announced today it expects to have to absorb an $850 million charge from the IRS, after a court said the bank couldn't utilize certain foreign tax credits it had come to count on. And BNY Mellon isn't the only American bank that might be affected by this decision.

1 for you, 19 for me
According to Financial Times, Wells Fargo (NYSE: WFC  ) has also benefited from the foreign tax credit scheme, which was arranged through British banking giant Barclays. The deals are called Structured Trust Advantage Repackaged Securities, or STARS, and were set up by Barclays from 1999 to 2006.

The suit against BNY Mellon was brought by the IRS, which claimed that STARS "amounted to tax shelters that exploited loopholes between U.S. and U.K. laws." BNY Mellon plans to appeal, but if the decision is upheld, it could allow the IRS to also come after Wells Fargo, as well as North Carolina-based BB&T (NYSE: BBT  ) . 

You'll be just fine, probably
BNY Mellon stated that it will be able to easily absorb the charge, and I believe them: A quick glance at the balance sheet shows $4.3 billion in cash on hand for the country's ninth largest bank, which means taking an $850 million hit -- while not fun -- is also not imperiling. And if the bank loses its appeal, so long as it starts figuring these denied tax credits into the cost of doing business, it will likely be fine.

Neither Wells nor BB&T has commented yet on the decision, nor is it yet known how much money they're into these STARS for. But with nearly $22 billion in cash on the balance sheet, Wells is also very well-capitalized and should therefore be able to easily absorb whatever potential costs lie down the road. Like BNY Mellon, Wells is also a very smartly run, conservative bank, and unlikely got itself into anything it couldn't handle.

BB&T? Well, with only $1.97 billion on the balance sheet, it doesn’t have the same level of cash; let's just hope management was smart in its dealings with the Brits, because an $850 billion hit would not be so easily absorbed. 

In case you didn't notice, Wells Fargo is one of my favorite banks in the market today. Its dedication to solid, conservative banking helped it vastly outperform its peers during the financial meltdown. Today, Wells is the same great bank as ever, but with its stock trading at a premium to the rest of the industry, is there still room to buy, or is it time to cash in your gains?

To help figure out whether Wells Fargo is a buy today, download our premium research report from one of The Motley Fool's top banking analysts. For instant access to this in-depth take on Wells Fargo, simply click here now.

Editor’s Note: A previous version of this article used an overly broad definition of "cash" for evaluating the banks' cash levels. It has been updated with a more meaningful reflection of their true cash positions.



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  • Report this Comment On February 12, 2013, at 5:06 PM, sdylanh wrote:

    $4.25 billion on the balance sheet? I think you left off a zero--$42.5 billion...

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