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Goldman Expects Tax Reform to Have a One-Time $5B Impact

The Goldman Sachs Group’s GS fourth-quarter 2017 results are likely to reflect a $5 billion negative impact triggered by the new tax reform, which levied taxes on overseas income. Also, deferred tax assets (DTAs) will lose value due to tax cut.

President Trump has opened doors for banks to bring back billions of dollars of cash they had stacked in other countries in order to avoid high tax rate in the United States. This is likely to strengthen the economy by increasing business spending.

The companies based in the United States are to pay a mandatory repatriation tax of 15.5% on cash and liquid assets, and 8% on illiquid assets, irrespective of whether the earnings are brought home immediately or not. However, upon payment of the tax, the companies would be free to bring the earnings back without any further taxes.

Goldman expects loss from DTAs to be a much smaller part of total one-time charge.

Apart from these charges, the investment bank expects the reform to be beneficial in the long term. Also, lower tax rates will increase earnings.

Expectations of Other Companies

Barclays plc BCS expects its annual post-tax profit to be written down by about $1.34 billion as a result of the U.S. tax overhaul. Also, it anticipates common equity Tier 1 capital ratio to fall 20 basis points.

Credit Suisse CS expects $2.3 billion as a one-time charge, which has put it at risk of reporting the third consecutive annual net loss in 2017.

UBS Group UBS had estimated a figure of nearly CHF 3 billion, with no impact on its capital strength.

Our Viewpoint

Goldman is likely to witness an upsurge in earnings as the tax reform is likely to result in increased M&As as well as bond and equity underwritings this year. Also, the company has been benefitting from its focus on diversifying revenue sources. Such strategic moves are likely to bolster Goldman’s performance.

Shares of Goldman have gained 12.1% over the past six months, underperforming 16.3% growth for the industry

Currently, the stock carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Credit Suisse Group (CS): Free Stock Analysis Report
 
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Goldman Sachs Group, Inc. (The) (GS): Free Stock Analysis Report
 
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