Fitch: Section 382 of IRS Code Delaying M&A for Banks with Large Deferred Tax Assets
Several U.S. banks reversed their valuation allowances during the fourth quarter of 2011 (Q4'11), and Fitch Ratings expects additional reversals in 2012. However, only a handful of banks in Fitch's rated portfolio have valuation allowances as of 4Q'11.
Fitch also believes that limitations caused by Section 382 of the Internal Revenue Code (IRC) regarding deferred tax assets (DTAs) have contributed to the lower volume of M&A activity in the U.S. banking sector.
Limitations associated with ownership changes under Section 382 of the IRC limit the value of DTAs when a change in ownership occurs. Fitch believes this may be a key valuation difference between buyers and sellers since the DTA is a real asset to the target, but likely has limited value to the potential acquirer.
Potential tax reform that could reduce the maximum tax rate for businesses would be an unequivocally positive cash flow event for the entire industry. However, in the quarter that such legislation is passed, banks with DTAs will have to record impairments. For certain banks with large DTAs, this could significantly reduce earnings not only for that quarter but for that year in addition to reducing the banks' capital bases.
Further details are available in Fitch's new report, 'U.S. Banks' Deferred Tax Assets', which is available at 'www.fitchratings.com.'
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: U.S. Banks' Deferred Tax Assets
Brandon Bajema, +1-312-606-2332
70 W. Madison
Chicago, IL 60602
Brian Bertsch, +1-212-908-0549 (New York)
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