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

Royal Bank president David McKay speaks at the Royal Bank of Canada annual meeting in Toronto on April 6, 2017. THE CANADIAN PRESS/Frank Gunn

TORONTO -- 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 an investment conference Tuesday that he expects a writedown of US$150 million, 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 US$150 million- to US$200-million going forward.

"(It's) a real positive story as far as impact to 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 (TSX:BMO) in November, confirmed Tuesday his bank's prior guidance that it would reduce its net deferred tax asset by US$400 million. However, he said that the bank also expects a positive economic impact of US$100 million annually, or 10 per cent of its U.S. earnings.

"That's a pretty attractive story," White told the conference, hosted by RBC (TSX:RY). "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.

Victor Dodig, CEO of Canadian Imperial Bank of Commerce, estimated it would record a one-time charge of $100 million stemming from Trump's tax changes. While CIBC (TSX:CM) 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 (impact) 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 (TSX:TD) has also said it expects its first-quarter results will be cut by roughly US$400 million, 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.

"But on a net basis... it should be beneficial for TD," he said.

Brian Porter, the chief executive of the Bank of Nova Scotia, says the charge it expects to record due to U.S. tax reforms is "not material," at an estimated $5 million- to $10-million.

He noted that Scotiabank, whose strategy has included increasing scale within the Pacific Alliance countries of Chile, Colombia, Mexico and Peru, earns roughly $500 million a year south of the border and does not have a lot of deferred tax assets in the U.S.

Porter noted that Scotiabank's deferred tax assets are in Canada and other jurisdictions.

Not all the talk Tuesday about U.S. policy was buoyant.

McKay said there is an increased likelihood that the North American Free Trade Agreement -- which Trump has repeatedly threatened to withdraw the U.S. from -- will be jettisoned.

"I think the probabilities are increasing that you will have some type of dynamic where there is an announcement of a scrapping of NAFTA," he said. "However, there is still a 180-day notice period where there is room for negotiation."

McKay added while there was room for "modernization" of the trade agreement, he agreed with the Canadian government's stance that "no deal is better than a bad deal."

"We don't want to be stuck long-term with a deal that hurts our economy."