Goldman Sachs Sees $5 Billion Earnings Hit Before New Tax Law

Posted December 29, 2017 7:31 p.m. EST
Updated December 29, 2017 7:36 p.m. EST

Goldman Sachs expects to take a $5 billion charge to its fourth-quarter earnings as a result of the tax bill that President Donald Trump signed into law last week, the bank said in a regulatory filing.

It is a one-time blow for Goldman. The benefits of the law’s tax cuts — including a reduction of the corporate income tax to 21 percent from 35 percent — will be much longer lasting.

Two-thirds of the estimated $5 billion charge comes from Goldman preparing to pay taxes on assets it holds overseas.

Another portion stems from the bank revaluing assets on its balance sheet it intended to use as a tax shield under the old, higher rate. Those assets are now worth less because the corporate tax rate is set to decline — the latest illustration of how companies have to reshape their finances to prepare for the new, lower tax rates.

Under the new tax law, companies may no longer be able to entirely avoid taxes on overseas holdings. But the tax they pay on those assets will drop to a rate of 8 to 15.5 percent, from around 35 percent. To avoid paying the higher rate under the old system, banks and other companies simply left their cash abroad.

Public companies are required to account for changes to tax laws during the quarter in which they are enacted, so even though the banks will not be sending checks to the IRS yet, their balance sheets must be adjusted to reflect what they will eventually owe.

Even as it made the necessary accounting adjustments resulting in the charge, however, Goldman was working to maximize the benefits it can still access before the new tax law takes effect Jan. 1. It disclosed in filings with the Securities and Exchange Commission on Thursday that it had delivered shares to Goldman’s chief executive, Lloyd C. Blankfein, and other top executives, completing the transfers earlier than in previous years. It typically delivers shares as part of its executive compensation packages in January.

According to a source familiar with the matter, the move let the bank access a tax credit that will disappear under the new law, worth $140 million this year. A “couple hundred” people in high-tax areas received their stock early, said the source, who spoke on condition of anonymity because the information was not public.

The shares Blankfein and others received Thursday cannot be sold for five years. They are not part of the executives’ 2017 pay packages; rather, they are portions of deferred compensation packages from the three previous years, the source said.

In recent weeks, some of Goldman’s competitors have also estimated one-time hits to their earnings because of the tax law. During a Dec. 5 conference, JPMorgan Chase’s chief financial officer, Marianne Lake, said moving overseas funds back to the United States could cost the bank up to $2 billion. On Dec. 6, the Citigroup chief financial officer, John Gerspach, said the bank could be facing a $20 billion charge. Bank of America said in a Dec. 22 filing it could book a $3 billion charge in its fourth-quarter earnings.

The charge from the tax bill will push Goldman from an estimated $1.9 billion in earnings for the quarter to a likely loss of around $3 billion. But its future is bright, along with that of other banks.

Goldman’s own bank analysts estimated on Dec. 18 that in the long run, big banks’ per-share earnings would increase by 13 percent, on average, under the new system.

Investors took the news in stride. Goldman’s shares were down about 1 percent in recent trading, while broader stock market indexes were essentially flat.

Goldman cautioned in its filing late Thursday that the actual earnings charge could differ significantly from its $5 billion estimate if the government issued new guidance on the applications of the law or if interpretations of the law’s components changed.