Donald Trump's planned U.S. corporate tax cuts could translateto a big one-time earnings hit for many of the biggest U.S. banks,thanks to tax benefits they generated during the 2008 financialcrisis.

Citigroup Inc. would take the deepest earnings hit — perhaps $12billion or more, according to recent estimates by the bank's chieffinancial officer and several banking analysts. Mark Costiglio, aCitigroup spokesman, declined to comment. Others, including Bank ofAmerica Corp. and Wells Fargo & Co. could facemultibillion-dollar write-downs.

The banks might have to write down deferred tax assets, whichoften pile up when a company loses money and can't immediatelyenjoy the tax benefits of those losses. Any write-downs won't havemuch impact on capital levels for the banks for regulatorypurposes, and lower taxes will allow for higher earnings in thelong run. But a one-time hit to earnings can make for a bruisingquarter — and even year — for a bank's results.

“It's a traumatic experience for companies with large” amountsof such assets, said Robert Willens, an independent tax andaccounting expert in New York. “In one fell swoop, a significantpart of their net worth goes up in smoke.”

Deferred tax assets, as disclosed in securities filings, consistof benefits that companies expect to use to cut their future taxbills. For most companies, the bulk of their value is tied to thecurrent U.S. corporate tax rate of 35%. (Assets stemming from, say,state tax bills are tied to state tax rates.)

The assets include unused credits for foreign taxes companieshave paid; deductions they're allowed to take in future years forprior losses; and future tax advantages that stem from so-called“timing differences” — gaps between when income or expenses arereported to shareholders and to the Internal Revenue Service.Analysts say that calculating the value of assets associated withtiming differences can be as much an art as a science.

Investors haven't begun to consider the effects of a corporatetax overhaul, said Frederick Cannon, the global director ofresearch and chief equity strategist at Keefe Bruyette & WoodsInc. “It's still very speculative to start pricing tax reform intoshare prices,” he said.

Citigroup had $45.4 billion in deferred tax assets as of Sept.30, almost all of them tied to the 35% rate.

If the rate is cut — as Trump and congressional Republicans havepledged to do — securities regulations could require the bank toimmediately slash the assets' value to reflect their reducedbenefit at a new, lower tax rate.

Trump and House Republicans, led by Speaker Paul Ryan, haveproposed dramatic corporate tax-rate cuts — part of what theypledge will be the biggest tax overhaul since President RonaldReagan's era. Trump has called for cutting the rate to 15%, whilethe House Republican “blueprint” for tax changes proposes 20%.

It's unclear which rate might prevail — or whether a deal mightbe reached for a wholly different rate. Amid that uncertainty, someanalysts and executives have calculated the potential effects of a25% rate — roughly the average corporate tax rate of the 34 membersof the Organization for Economic Cooperation and Development.

At a 25% rate, Citigroup would be required to lower its earningsby $6 billion to reflect the reduced value of its tax-deferredassets, John Gerspach, the bank's CFO, told investors at aconference hosted by Bank of America on Nov. 16.

But that could change if a Republican call for exemptingoverseas corporate earnings from U.S. taxation is enacted as partof the tax overhaul. Under that scenario, Gerspach said, Citigroupwould have to write down as much as $12 billion — because a largepart of its deferred tax assets consist of unused foreign taxcredits.

Calculations by Brian Kleinhanzl, a financial sector analyst atKBW, show that at a 25% corporate tax rate, Bank of America wouldface a $6.6 billion write-down, while Wells Fargo's would be $4billion. Goldman Sachs Group Inc.'s would be $1.6 billion,according to KBW's estimates.

Offsetting Rate

“Over time, any impact will be offset by lower rates,” saidJerry Dubrowski, a spokesman for Bank of America. Ancel Martinez, aspokesman for Wells Fargo, declined to comment. “It is impossiblefor us to comment until we have seen legislative detail,” said JakeSiewert, a Goldman Sachs spokesman.

To be sure, any federal tax overhaul might include rulesallowing companies more time to generate taxable income and fullyharvest their deferred tax assets. Also, the one-time hit toearnings would be followed by higher income over the longer term,which would allow many banks to build capital faster.

“Long term, it's positive, because companies will reportincreased earnings per share,” said KBW's Cannon. “Short-term, taxreform won't have as large a positive effect on banks — Citi is the800-pound gorilla.”

The implications might also reach mortgage giants Fannie Mae andFreddie Mac, which could see write downs of $10 billion and $5.4billion respectively, according to a Nov. 27 KBW research note.Those hits would be large enough to potentially require both ofthem to seek a new infusion of money from the Treasury Department,the note said. Peter Garuccio, a spokesman for the Federal HousingFinance Agency, which oversees the government-backed lenders,declined to comment.

The short-term bad news has a financial flipside: Companies withso-called deferred tax liabilities — future tax bills that they nowexpect to pay at the 35% rate — would get a sudden windfall if thecorporate rate is cut. Winners would include AT&T Inc., whichcould see an immediate, one-time earnings boost of as much as $30billion, and Apple Inc., which could see an extra $15 billion,Willens said. AT&T's tax liabilities stem from depreciation andamortization tied to investments in equipment, he said, whileApple's relate to anticipated U.S. tax bills on overseasearnings.

“Clearly, a rate cut is a double-edged sword,” said LayneAlbert, an accountant and tax services partner at accounting firmGrant Thornton.

Fletcher Cook, an AT&T spokesman, declined to comment, asdid Josh Rosenstock, an Apple spokesman.

Meanwhile, Trump and Congress have both predicted swift actionon a tax overhaul, leaving companies that face write-downs toconsider the implications.

“Although I don't think they'd say so publicly, there are somecompanies that would just as soon forgo the rate cut, so as topreserve the sanctity of their balance sheet,” Willens said.

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