Financial Services

Morgan Stanley signals $1.25bn earnings hit from Trump tax change

Drag mostly due to charge relating to US deferred tax assets, says company

Morgan Stanley is the latest in a line of major US banks to detail an expected near-term tax hit. Photograph: Reuters

Fri Jan 5 2018 - 15:10

Morgan Stanley said it will take a roughly $1.25 billion (€1.04 billion) hit to earnings in the fourth quarter, becoming the latest bank to detail how profit will be hurt in the near term by the US tax overhaul driven by president Donald Trump.

The drag on net income consists of a charge of about $1.4 billion (€1.16 billion), primarily from writing down its US deferred tax assets, the company said in a filing on Friday. That’s being offset by a gain of about $160 million (€133 million) related to a multiyear tax examination. The estimated tax provision is based on assumptions made by the firm and may change as it receives additional clarification, it said.

Mr Trump last month signed into law congressional Republicans’ tax overhaul, his first major legislative victory. The move slashes the corporate-tax rate to 21 per cent from 35 per cent, a cut that could benefit some banks. The plan also offers some temporary breaks for other types of businesses and individuals.

Deferred tax

While banks will benefit from the lower rate, the new law requires charges in the near-term as foreign earnings face taxation and the value of deferred tax assets declines. Goldman Sachs Group revealed last week that its earnings would be crimped by about $5 billion (€4.15 billion), mostly from the repatriation tax, while Bank of America announced a $3 billion (€2.49 billion) charge.

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Citigroup has said it expects a hit of as much as $20 billion (€16.6 billion), mostly from writing down its DTAs. That was under an earlier version of the plan. JPMorgan Chase and and Capital One Financial have warned that tax changes could hit their earnings.

Ultimately, the new rate should allow banks to deliver a higher return on equity, thus given them greater freedom to increase shareholder payouts and staff bonuses.

– Bloomberg/Reuters

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