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Christmas Comes Early for Bank Stocks: Tax Reform Bill Passed

Zacks Equity Research
Tax reform bill will help the banks to gain from increased earnings and higher revenues going forward.

A huge Christmas gift has arrived early for corporate America as the much-awaited tax reform bill has been passed. The bill cuts corporate tax to 21% from 35%, allowing a one-time tax break to companies that have stashed cash overseas.

This is likely lead to huge savings and cash repatriation for the companies. The bill is likely to benefit a few sectors along with some stocks. If we talk about banks and technology stocks, the former stand to benefit more than the latter.

While tech companies that have significant amounts of cash stashed overseas will gain from one-time repatriation, they are less likely to benefit from tax rate cut as compared to the banks.

Wondering how banks are anticipated to gain more? Apart from bringing back overseas cash, banks will benefit considerably from lower tax rates. Per a Wells Fargo analyst, finance companies pay the highest effective tax among the major S&P sectors.

Therefore, several large banks including Wells Fargo WFC, JPMorgan JPM and Bank of America BAC are likely to record a double-digit increase in earnings in the coming years driven by lower tax rate. Further, it will be easier for global banks to compete with lower taxed foreign banks.

Additionally, smaller domestic banks will also gain. They are expected to use increased earnings by upgrading technology and may even pass on the benefits to their employees in form of pay rise and one-time bonus. Well, many banks including Washington Federal, Inc. WAFD, Wells Fargo and Fifth Third Bancorp FITB have already announced such initiatives.

Also, as overseas cash is brought back, it is expected to provide an impetus to M&As activities, thereby boosting investment banking. Also, as the bill will lower tax rates on wealthy individuals, asset management units of banks are expected to see a rise in money available for investment.

Moreover, as the tax bill spurs economic improvement leading to a rise in lending activities and higher interest rates, banks will benefit indirectly as well. So, this is a win-win situation for the banks.

Of the above-mentioned banks, Washington Federal carries a Zacks Rank #2 (Buy), while JPMorgan, Wells Fargo, BofA and Fifth Third have a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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J P Morgan Chase & Co (JPM) : Free Stock Analysis Report
Fifth Third Bancorp (FITB) : Free Stock Analysis Report
Wells Fargo & Company (WFC) : Free Stock Analysis Report
Bank of America Corporation (BAC) : Free Stock Analysis Report
Washington Federal, Inc. (WAFD) : Free Stock Analysis Report
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