A contemplated corporate tax hike in the U.S. would put a US$15-billion dent in banks’ bottom lines, but wouldn’t hurt their creditworthiness, says Fitch Ratings.

In a new report, Fitch said that a potential increase to the U.S. corporate tax rate from 21% to 28% would represent a “moderate drag” on bank earnings, but the rating agency views the effect as “manageable.”

In total, a federal tax hike would cost banks an estimated US$15 billion annually, Fitch said, with their effective tax rate rising to approximately 25% from 20% at the end of 2020.

“Aggregate net income for all U.S. banks would have been 7% lower in [the fourth quarter of 2020] with a 28% corporate tax rate,” Fitch said.

Want more immediate, memorable insights? Listen to this Soundbites episode, featuring Susan Spence, vice-president of Portfolio Solutions Group.

A higher corporate tax rate could also incentivize banks to utilize more tax avoidance strategies, such as investing in assets that enjoy preferential tax treatment (such as municipal bonds) and increasing their use of affordable housing tax credits or alternative energy credits, Fitch suggested.

“Many banks have already grown their investment in social or environmental activities not only as part of a larger focus on ESG, but also as a way to reduce their effective tax rate,” the report said.

“Higher corporate tax rates make the internal rate of return for tax avoidance strategies more attractive,” Fitch added. “A change in the corporate tax rate to 28% from 21% would increase tax savings by over 30% for these types of strategies.”

Higher taxes could also put pressure on banks’ internal capital generation abilities, the report said.

However, Fitch noted that “the increase would be viewed as neutral to credit as it would have no impact on Fitch’s core earnings metric, operating profit to risk-weighted assets, and could vary for individual banks.”

A higher tax rate would also affect the value of deferred tax assets and liabilities, Fitch said, noting that such an impact “is expected to be mixed, and could have a material effect on the quarterly earnings for some banks if and when the tax changes are enacted.”

Banks with net deferred tax asset positions “could see significant one-time gains,” the report said, whereas those with net liabilities could face one-time earnings charges from the revaluation.