In July last year, a furious Jamie Dimon unleashed a broadside at the establishment in Washington. It was “almost an embarrassment to be an American” because of the “stupidity” of politicians, the chief executive of JP Morgan said on a conference call with analysts.
What a difference a tax cut makes. The Republican tax reforms, passed late last month, were “a significant positive outcome for the country”, Mr Dimon said on Friday last week. The cuts would “benefit all Americans”, he claimed.
His peers have echoed the positive sentiment. Lloyd Blankfein, the boss of Goldman Sachs, the country’s largest investment bank, said yesterday that the new tax law would create tailwinds. Michael Corbat, the boss of Citigroup, America’s fourth largest bank, said on Tuesday that the broader business environment “is as positive as we’ve seen in many years” and that the tax overhaul could “change the sentiment among those making investment decisions from optimism to confidence”.
Corporation tax was cut from 35 per cent to 21 per cent this year and companies were offered a carrot to bring home profits stored overseas — a one-time tax of 15.5 per cent on those stashes. The six biggest banks are expected to benefit handsomely after initial adjustments.
Five of them have written off $33 billion from their fourth-quarter results. Citigroup wrote off $22 billion, Goldman Sachs’s charge was $4.4 billion, Bank of America’s was $2.9 billion and JP Morgan’s, $2.4 billion. Morgan Stanley, which reports today, is expected to write off $1.3 billion.
However, stripping out these tax charges, four of the five banks that have reported their fourth-quarter figures improved their profit in 2017. The outlier is Wells Fargo, America’s third largest lender, which booked a $3.4 billion fourth-quarter windfall linked to the tax reforms. However, the bank also took a $3.3 billion charge to cover litigation costs related to the false accounting scandal that erupted in 2016. The issue continues to dog the bank.
Profits might have been stronger across the board but for banks’ trading desks. Trading revenues have fallen dramatically since the start of last year because of calm markets and lower demand for bonds. This was bad news for Goldman Sachs and Morgan Stanley, the two “pure play” investment banks among the Big Six. Goldman had an awful 2017 and in the fourth quarter the decline at its once revered fixed-income, currency and commodities trading desk accelerated. Morgan Stanley held up better last year.
JP Morgan, Bank of America, Wells Fargo and Citi have much bigger loan books than the pure investment banks and stand to benefit from rising interest rates, which the Federal Reserve is set to lift at least three times this year.
At Wells Fargo, net interest income — the money that a bank makes from loans — fell by 3 per cent in the fourth quarter compared with a year earlier. At Citi, it edged up by 1 per cent. At Bank of America and JP Morgan, it climbed by a healthy 11 per cent.
Bank of America’s traders also had a decent end to a bad year. Equities trading revenue was flat, the same as at JP Morgan, as fixed-income, currency and commodities revenue fell by 13 per cent, the least of any of the banks to have reported so far.
Since taking over as the boss of Bank of America in 2010, Brian Moynihan has focused on cutting costs and positioning the lender to capitalise on rising interest rates. Last year the bank was only $2 billion shy of its goal of $53 billion annual expenses and in the fourth quarter loans increased across the board compared with a year earlier: by 9 per cent in consumer banking, 7 per cent in wealth management and 4 per cent in corporate banking.
The timing appears to be just right for Mr Moynihan.
ADVICE Buy
WHY Given the balance of Bank of America’s business, it is probably the pick of the Big Six right now
Craneware
Some numbers are guaranteed to delight investors and few can have been happier of late than those of Craneware. The software group’s share price has trebled over the past three years and it has consistently boosted its dividend. A clear case of the more, the merrier.
Craneware makes tools and applications for the healthcare market in the United States, allowing hospitals to monitor what they are spending and how patients are paying. Founded in 1999 in Scotland, it was listed on the junior Alternative Investment Market in 2007. Though the company has always operated over the Atlantic and more than a third of US healthcare providers use its software, its main development team is based in Edinburgh.
The introduction of new products, including better data analytics, mobile device applications and tools for patients, has broadened Craneware’s offering and that appears to be paying off. Existing customers are buying more services and it is winning new business. A $16 million deal covering more than 70 hospitals was signed this month.
Structural changes in the United States, including moves by the Obama administration to make medical care more affordable and subsequent plans under President Trump to undo much of that, appear to have had little impact on the company. Keith Neilson, co-founder and chief executive, notes that the need to save costs by monitoring, recognising and collecting revenue better doesn’t change.
This year Craneware is expected to beat the $16.9 million pre-tax profit on revenue of $57.8 million it booked in the 12 months to June 30, 2017. It paid a 20p dividend that year. Contract renewal by dollar value was more than 100 per cent in the six months to December 31 and it forecast last week that revenue and underlying profit would rise by up to 18 per cent in the period.
Some of the $53 million of cash it holds will be spent on a limited share buyback scheme, which runs until Monday. Those who bought shares for 128p a pop when Craneware floated more than a decade ago and continue to hold them will be pretty pleased with themselves. In recent days those shares have been changing hands for as much as £18.
ADVICE Buy
WHY Craneware will grow further on back of new deals