Banks see initial writedowns, future earnings bump under Trump tax changes

Canadian banks are expecting some short-term pain from U.S. President Donald Trump's tax overhaul, but a significant lift on future earnings.
Royal Bank president David McKay speaks at the bank's annual meeting in Toronto on April 6, 2017. The chief executives of Royal Bank and Bank of Montreal are expecting first-quarter writedowns due to U.S. President Donald Trump's tax changes, but also significant tax savings on future earnings. (Frank Gunn/Canadian Press)

Canadian banks are expecting some short-term pain from U.S. President Donald Trump's tax overhaul, but a significant lift on future earnings.

RBC chief executive Dave McKay told a investment conference Tuesday that he expects a writedown of $150 million US, plus or minus 10 or 15 per cent, in the bank's first quarter. However, he said Canada's biggest bank by market capitalization is expecting an annual tax-positive benefit of $150 million US to $200 million US going forward.

"(It's) a real positive story as far as impact the bottom line from tax in the United States," McKay told the industry conference.

Meanwhile, BMO CEO Darryl White, who took the helm of the bank in November, confirmed Tuesday his bank's prior guidance that it would reduce its net deferred tax asset by $400 million US. However, he said that the bank also expects a positive economic impact of $100 million US annually, or 10 per cent of its U.S. earnings.

"That's a pretty attractive story," White told the conference, hosted by RBC. "Nobody put that in their business plan two years ago."

Late last year, as part of a massive overhaul of U.S. tax laws signed by Trump, the corporate income tax rate was cut to 21 per cent, from 35 per cent, effective this year. The move is expected to lift future corporate earnings, but the tax cut also reduced the value of deferred tax assets already held on company balance sheets. In turn, firms are expected to recognize one-time charges related to the change.

The CEO of the Canadian Imperial Bank of Commerce Victor Dodig estimated it would record a one-time charge of $100 million stemming from Trump's tax changes. While CIBC would also expect an uptick to its earnings in the long run, it would be "negligible at first," given the size of its U.S. business at 12 to 13 per cent of the bank's overall earnings, he added.

"We anticipate that to grow on a relative basis as the business grows," Dodig told the audience. "We have said that the business is going to grow to 17 per cent of our business, over time."

Toronto-Dominion bank has also said it expects its first-quarter results will be cut by roughly $400 million US, but the lower corporate rate is expected to have a "positive" effect on its future earnings.

TD chief executive Bharat Masrani told the conference that it did not quantify the exact impact because the tax reform package is quite complicated and has some ambiguities, and further guidance is required from the Internal Revenue Service and the U.S. Department of Treasury. He said Canada's largest bank by assets is working through the changes and expects to provide more details after the first-quarter, which ends Jan. 31.