Stocks have been rising over the past week on hopes that Congress will be able to lower the top corporate tax rate from 35% to 20%. Few companies would benefit as much from this as big banks, such as Bank of America (BAC +1.27%).
Over the past 12 months, only five companies on the S&P 500 have out-earned Bank of America on the bottom line. The Charlotte, North Carolina-based bank has generated just under $20 billion in net income over that stretch.
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The net result is that Bank of America pays a lot in income taxes. Its income tax expense last year came out to $7.3 billion. That equates to 29% of the bank's income before taxes.
If the corporate tax rate were dropped to 20%, in other words, Bank of America would be a major beneficiary. Based on those simple numbers alone, its tax liability could fall by as much as a third, though, as the bank points out in its latest 10-K, it's hard to make a precise estimate:
Policy makers have indicated an interest in reforming the U.S. corporate income tax code in 2017. Possible approaches include lowering the 35 percent corporate tax rate, modifying the U.S. taxation of income earned outside the U.S. and limiting or eliminating various deductions, tax credits and/or other tax preferences. It is not possible at this time to quantify either the one-time impacts from the remeasurement of deferred tax assets and liabilities that might result upon tax reform enactment or the ongoing impacts reform proposals might have on income tax expense.
One of the things to keep in mind is that a corporate tax cut isn't unequivocally positive for Bank of America.
As the bank alludes to above, it also has to factor in the impact that a change in the corporate tax rate will have on its deferred tax assets. These are basically leftover losses that the bank can apply to offset income in the future.
At the end of last year, Bank of America had $19.2 billion in net deferred tax assets. An estimate by Keefe, Bruyette & Wood's Brian Kleinhanzl concluded that a drop in the top corporate tax rate to 25% would reduce Bank of America's tangible book value by $4.4 billion, as a result of a more than $6 billion revaluation of these assets. A drop even further to 20% would presumably push this higher.
Data source: KBW. Chart by author.
Either way, it's fair to say that corporate tax cuts would be welcomed with open arms by banks, and the biggest banks in particular, which will be able to more than offset the one-time hit to the value of their deferred tax assets by saving hundreds of millions -- if not billions -- of dollars under a 20% top corporate tax rate.
