Tax Cut Policy: A One-Time Hit on Morgan Stanley’s Earnings


Jan. 22 2018, Updated 12:50 p.m. ET

Tax cut policy

President Donald Trump signed a bill to cut corporate tax rates from 35% to 21% last month. In the long term, these changes will lead to increased profits and more dividends and share buybacks for investors. In the short term, however, these changes will affect companies’ revenues. Charges taken for tax have created a revenue dent for most banks, including Citigroup (C), Bank of America (BAC), and Goldman Sachs (GS).

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Morgan Stanley (MS) has reported a one-time net discrete tax provision of $990 million, composed of a ~$1.2 billion tax discrete provision offset by ~$168 million associated with reserves and interest-related tax examinations. Most of the hit came from its deferred tax assets, which were revalued to a lower rate when corporate tax rates fell.

Tax cut’s effects on 4Q17 results

Morgan Stanley’s reported net income and EPS (earnings per share), including the effects of the tax cut, were $686 million and $0.29, respectively, while its ROE (return on equity) was 2.9%. If we ignore this effect, the company’s net income stands at $1.7 billion, its EPS stand at $0.84, and its ROE stands at 8.6%.

For the whole of 2017, Morgan Stanley’s reported ROE was 8.1%, and its adjusted ROE was 9.4%. Its effective tax rate for 4Q17 was 71.5%, or 31.4% excluding the impact of the net discrete tax provision.

Management’s comments

According to Morgan Stanley’s management, a reduction in taxes will be beneficial for the US economy and banks as it will help them compete with their international rivals. Provisions such as the repatriation of overseas cash will be a boon for the US mergers and acquisitions business, which should, in turn, boost investment banking. Banks’ wealth management divisions should also benefit because the bill reduces taxes on the rich.

MS makes up 2.3% of the iShares U.S. Financial Services ETF (IYG). This fund includes banks, financial companies, and financial services companies.


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