By Sweta Singh and Elizabeth Dilts
(Reuters) - Bank of America Corp's quarterly profit was nearly chopped in half by tax-related charges but the lender's management promised the new U.S. tax system would eventually benefit shareholders.
The tax overhaul, signed by U.S. President Donald Trump late in December, is taking a chunk out of Wall Street profits this quarter as lenders swallow one-time charges on overseas earnings and account for tax benefits that are now less valuable because of the lower corporate rate.
Leaving aside the tax hit, which Bank of America announced late last year, profit topped analyst expectations.
The bank's shares closed 0.2 percent lower at $31.18. They had run up nearly 16 percent in the past three months, leading gains in a sector that rose broadly in anticipation of the tax bill.
Investors expect the eventual windfall from lower tax rates to be passed on through higher dividends and more share buybacks. They are also watching for knock-on effects of the overhaul like higher borrowing, trading and deal activity that would boost the bank's bottom line.
Bank of America Chief Executive Brian Moynihan said some tax savings would be funneled into technology investments but the bulk of the windfall would be returned to investors.
"Most of the benefits will fall to the bottom line and be used to return to shareholders," he said.
The lender expects its effective tax rate this year to be around 20 percent, 9 percentage points lower than 2017.
The second-largest U.S. bank by assets booked a $2.9 billion charge related to the tax overhaul, which dragged its net income down to $2.37 billion.
Excluding that charge, it earned $5.3 billion, or 47 cents per share. According to Thomson Reuters I/B/E/S, excluding the tax charge and another item, the company earned 48 cents per share, topping analysts' estimate of 44 cents.
The bank trades at a lower valuation than some rivals and its quarterly return on equity was 7.8 percent, down from 8.1 percent at the end of the third quarter and below a 10 percent theoretical cost of capital.
THE DEFINITION OF RISK
Dogged for years by litigation and penalties stemming from the financial crisis, Bank of America has been put on a more stable footing by Moynihan’s years-long effort to cut costs and focus the bank’s sprawling operations.
The lender's large stock of deposits and rate-sensitive mortgage securities make it especially well placed to benefit from interest rate rises. Its net interest income rose more than 11 percent to $11.46 billion, helped by the three Federal Reserve rate hikes in 2017.