An RBC sign is seen in the financial district on Bay St in Toronto.Mark Blinch/The Globe and Mail
Some of Canada's biggest banks are bracing to take a one-time hit to profits as a result of major tax cuts in the United States, but they expect to earn any short-term losses back in spades.
Royal Bank of Canada expects to take a $150-million (U.S.) writedown in the first fiscal quarter as the new U.S. tax rules kick in. But Canada's largest bank believes it will earn that sum back by the third quarter as a dramatically lower corporate tax rate lifts the bank's earnings.
Canadian Imperial Bank of Commerce, which is building out its U.S. footprint after acquiring Chicago-based PrivateBancorp Inc. for $5-billion last year, expects to take a $100-million writedown in the first quarter. But like its peers, CIBC expects to begin earning that sum back as its U.S. business grows.
The one-time charges are largely caused by reductions in banks' deferred tax assets – an accounting measure tied to the timing between a bank booking a tax loss and realizing its benefit. And bankers are still working through the fine print of the sprawling U.S. tax bill passed last month. At an industry conference on Tuesday, RBC chief executive officer Dave McKay cautioned that the exact cost of his bank's writedown could vary 10 per cent to 15 per cent higher or lower, depending on the details.
But the bottom line is that Canadian banks doing substantial business in the U.S. expect to pay far less in taxes, as the marginal corporate rate plunges from 35 per cent to 21 per cent. That will give banks' profits a sudden and unanticipated boost: Mr. McKay said RBC expects to earn between $150-million and $200-million more each year as a result, without any noticeable impact on the bank's capital levels. Over the long term, RBC expects "a real positive story as far as impact to the bottom line from tax in the United States," Mr. McKay said.
A December research report by analysts at Citigroup Global Markets Inc. predicted that earnings per share at four of Canada's largest banks will rise by 1 per cent to 3 per cent as a result of the U.S. tax changes.
Toronto-Dominion Bank's CEO, Bharat Masrani, also believes the U.S. tax cuts "will be beneficial" in the long run. TD disclosed on Monday that it expects to take a one-time, $400-million writedown when it releases first-quarter earnings on March 1. But Mr. Masrani was more cautious about predicting how much higher profits could climb in subsequent quarters.
"This particular tax reform package is quite complicated. There's some ambiguities," Mr. Masrani said at Tuesday's conference. "I'd rather ensure that we have a better handle on all these moving parts and then come out with more colour."
Bank of Montreal CEO Darryl White also chimed in on Tuesday, confirming projections the bank released last month that BMO will write down its net deferred tax asset by about $400-million in the first quarter. He expects BMO's annual profit will rise by around $100-million, providing a long-term gain.
"That's a pretty attractive story. Nobody put that in their business plan two years ago," Mr. White said.
Meanwhile, any increase in CIBC's earnings as a result of the lower tax rate will be "negligible at first," according to CEO Victor Dodig. That's because CIBC's U.S. business is still smaller, relative to several of its competitors. But CIBC has set a target to increase the share of total profit coming from U.S. operations to 17 per cent by 2020, and benefits from the new tax rules will "grow on a relative basis," Mr. Dodig said.