By Sweta Singh and David Henry
(Reuters) - JPMorgan Chase & Co (N:JPM) beat Wall Street's fourth-quarter earnings expectations on Friday and said tax law changes will help future profits by not only reducing the amount it pays the federal government but also by stimulating more business.
JPMorgan, the biggest U.S. bank by assets, recorded $2.4 billion in one-time charges in the fourth quarter related to the tax law changes. However, it expects its effective tax rate to drop to 19 percent this year from 32 percent last year, which will save it billions of dollars.
The sweeping tax changes President Donald Trump signed into law in December, designed to kick-start economic growth, slashed the U.S. corporate rate to 21 percent from 35 percent.
As a result, JPMorgan said it expects corporations to borrow more, offer more stock and pursue more mergers and acquisitions, all of which would boost revenue.
Although the bank plans to use some of that money for compensation, business investments, helping rural communities and other uses, it will mostly boost profits, executives said on a call with analysts.
"Much of it will fall to our bottom line in 2018 and beyond," Chief Financial Officer Marianne Lake said on a call with analysts.
The bank's shareholders should benefit as JPMorgan returns more capital to them through dividends and stock buybacks, she said.
Several financial companies, including Citigroup Inc (N:C) and Morgan Stanley (N:MS), have warned investors that they will face short-term pain over some of the tax changes. However, over the longer term, the changes are widely expected to generate gains for large U.S. corporations.
Some of the benefits will likely be lost as banks vie to offer better deals to customers, starting with businesses where prices change more quickly, Chief Executive Jamie Dimon said.
JPMorgan's charges related to a one-time repatriation tax on income it has kept abroad and adjusting the value of its deferred tax assets and liabilities. The bank said it does not expect to bring any substantive amount of the foreign cash home, because it has capital and liquidity requirements abroad.
JPMorgan's shares were up 1.3 percent at $112.18.
RISING RATES, STEINHOFF WOES
Excluding one-time items, JPMorgan's fourth-quarter profit was higher than analysts had expected. Rising interest rates produced gains in net interest income that offset a slowdown in trading revenue.
The bank's adjusted net profit was $6.7 billion, or $1.76 per share, compared with the average estimate of $1.69 per share. Net revenue rose 4.6 percent to $25.45 billion and beat the estimate of $25.15 billion.
Including the tax charge, its net profit fell to $4.23 billion, or $1.07 per share, from $6.73 billion, or $1.71 per share, a year earlier.
Analysts were generally positive about the results, although some asked for more detail on how the bank will use its expected tax savings and expressed concern about the benefits fading quickly in a competitive environment.
JPMorgan's earnings per share would have been 17.5 percent higher last year if its taxes had been as low as they will be going forward, according to an estimate by Glenn Schorr of Evercore ISI, who rates JPMorgan shares "outperform."
"Good economy, lower tax rate and continued JPMorgan-specific strength ... should keep people plenty happy," he wrote in a note to clients.
Trading revenue across the industry has been under pressure due to low volatility. Markets were especially active in the year-earlier quarter as investors changed positions around the U.S. election.
JPMorgan's bond trading revenue fell 27 percent. Equity trading revenue was flat, after a mark-to-market loss of $143 million on a margin loan related to troubled South African furniture retailer Steinhoff International (J:SNHJ) (DE:SNHG).
The bank set aside an additional $130 million for potential credit losses related to Steinhoff, which has been embroiled in an accounting scandal.
Lake said other banks may also take a hit from the loan which was syndicated. Other banks with substantial lending exposure to Steinhoff include Commerzbank (DE:CBKG), UniCredit (MI:CRDI), Calyon, BNP (PA:BNPP), HSBC (L:HSBA), Citigroup Inc (N:C), Mizuho (T:8411) and Bank of America Corp (N:BAC).
Rising interest rates helped JPMorgan cushion the blow from lower trading revenue, lifting net interest income by 11 percent to $13.4 billion.