How lower taxes could hurt America’s big banks
WHEN is a corporate-tax cut bad for a corporation? When it would trigger hefty write-downs of peculiar but critical assets, as is the case at some of America’s largest banks. The accounting item in question is the deferred-tax asset (DTA). This is a legacy of the financial crisis. America’s tax code allows losses amassed during the meltdown (with some restrictions) to be used to offset future tax bills. Since a bank is increasing its future cashflows by reducing expected tax payments, this is recorded as an asset on the balance-sheet.
JPMorgan Chase held DTAs of $16 billion at the end of last year, while Bank of America had $27 billion-worth. The undisputed deferred-tax king, however, is Citigroup with slightly more than $50 billion-worth, the largest discretionary accounting item in the company’s history.
To some, this looks highly optimistic. Mike Mayo, an analyst with CLSA, a broker, has relentlessly questioned Citi’s ability to produce enough taxable income to justify the asset and has suggested that it could be overvalued by $10 billion—a view for which he was, for a time, blackballed and badmouthed by the firm’s top brass. Citi rejects the suggestion that it is counting imaginary beans. Its DTA is, according to its latest filing, recognised subject to management’s judgment that realisation is more likely than not (though it acknowledges that some help from tax-planning strategies may be needed).
Banks with DTAs have to worry about electoral politics as well as future profits. With Barack Obama and all the Republican presidential candidates either keen or at least prepared to lower the top rate of federal corporate tax from today’s 35%, a reduction over the next year or two looks reasonably likely, with an outside chance of a sharp cut. Any such move would make DTAs less valuable since future tax deductions would be worth less. With tax at 35%, a dollar of such deductions saves a company 35 cents. A cut to 20% would reduce the benefit to 20 cents.