Bank of America
Quarterly profit at the Charlotte, NC-based bank, the second largest in the US by assets, rose to $6.784 billion from $5.106 billion a year earlier. Per share, earnings were 63 cents. Analysts had expected 57 cents a share.
A lot of the banks' success has to do with the persistently positive economic growth trends in the US economy. An expanding economy supports a bullish environment for banks, which would theoretically incentivize big banks to increase their dividends and share buybacks. Plus banks' valuations are reasonable at this point relative to the market.
Moreover, the perception of some relief from trade war concerns may lift investors' sentiment around the economy. Even quarterly earnings results that fall in line with estimates should reinforce investor confidence in banks' operating performance. Exceeding expectations on the Fed's stress tests last month would also render a bullish perspective on banks.
However corporate tax cuts seem to be the major driving force behind such gains. Without the tax cut, bank earnings growth in the second quarter would have been dramatically less. Instead, the nation's six biggest banks are set to report a 14% improvement in earnings in the April-to-June period. Nine of every 10 dollars of that increase is thanks to the tax cut. Just one dollar came from an actual improvement in operations. 86% of BAC's profit increase came from a lower tax rate, which dropped to 20% for the bank earlier in the quarter.
In fact, the price action of banks this year has been far from desirable. The financial sector is still negative year to date even as the broader markets have recouped most of their annual losses, and the financials-tracking XLF is on the cusp of correction territory.
Thus, investors have been more skeptical of how much boost the tax cuts would actually provide to the economy this year, and the big banks' second-quarter profits seem to suggest why. The fear still seems to be that tariffs and a growing trade war could wipe away whatever economic gains will come from the tax cuts. But if second-quarter profits for the entire market shake out similarly to how they have for the banks, there could be growing concern that the tax-cut turbocharger was overhyped to begin with.
Looking ahead, stimulus from corporate tax cuts and the regulation pendulum swinging back into favor for the big investment banks should prove positives. However, banks need to focus on utilizing the tax cuts to improve operations and core financials, in order to have a more efficient working structure in case of extreme events pertaining to the ongoing trade war or any politically-induced market volatility.
