Then there is speculation that the Trump Administration’s efforts at tax reform could boost bank earnings.
“The timing and nature of any corporate tax changes remains uncertain; whether any tax savings would be retained is unclear. Under pro forma assumptions, ROAs would increase to varying degrees, as illustrated with 25% and 20% effective tax rate scenarios – see table below. The effective tax rate for all US bank holding companies was 30% as of 3Q16,” said Fitch Ratings in a recent note.
Some analysts believe investors’ new found faith in the financial services sector will ultimately be rewarded. XLF and rival financial services ETFs have been bolstered this year after President Donald Trump revealed plans to scale back 2010 Dodd-Frank legislation, which increased regulations on banks and financial services companies following the global financial crisis.
“Any DTA reductions would be reflected as a charge through income tax expense in the revaluation period, which would have a negative effect on earnings and equity. Conversely, downward adjustments to DTLs would decrease income tax expense and have a positive effect. Therefore, banks with net DTL positions may benefit the most from a change in the federal tax rate,” adds Fitch.
For more information on the financial sector, visit our financial category.