December 29, 2017 / 8:04 PM / a year ago

Breakingviews - Goldman loses on tax swings, gains on roundabouts

A sign is displayed in the reception of the Sydney offices of Goldman Sachs in Australia, May 18, 2016. REUTERS/David Gray/File Photo

NEW YORK (Reuters Breakingviews) - Goldman Sachs is going to lose on the swings but gain on the roundabouts as a result of President Donald Trump’s tax reforms. The Wall Street firm will book a $5 billion charge in the fourth quarter, it said on Thursday, two-thirds of it from a new levy on the $31 billion or so earnings it holds abroad. Yet that should be more than offset by other goodies, notably a significantly lower corporate tax rate.

On the face of it, a $5 billion extra tax expense will push Lloyd Blankfein’s firm to a $3 billion quarterly loss, based on Eikon estimates. But each of Goldman’s rivals will tell a different story. Citigroup, for example, has forecast a $20 billion hit as the new law reduces the value of its deferred tax assets, of which Goldman has far fewer. Deciphering bank earnings is always tricky; in 2018 investors will really need to sharpen their pencils.

Furthermore, Goldman’s loss isn’t necessarily what it at first seems. Take the $3.3 billion or so that applies to its earnings held abroad. Companies can opt to pay that over eight years, in increasing amounts. Were Goldman to do so, a one-off cost would turn into a stream of cash outflows that, discounted back at a 10 percent cost of capital, are equivalent to only $2 billion in today’s money.

A bigger impact is likely to come from the corporate income-tax rate falling to 21 percent, far below the effective 28 percent Goldman paid in 2016. Using Morgan Stanley estimates of its rival’s earnings for the next four years, and assuming a conservative 3 percent earnings growth rate thereafter, Goldman stands to make savings with a nominal value of nearly $9 billion over the next eight years, according to a Breakingviews calculation. That may explain why the stock was down by barely half a percent on Friday.

Then there’s the big question: what happens to the money companies can now bring home? If Blankfein’s firm pays a chunk out to shareholders it could boost the company’s value further – and give a sizable payday to the already wealthy. Much about the impact of the tax changes remains murky. What’s clear is that the impending flurry of tax-related accounting announcements deserves to be taken with a pinch of salt.


Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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