Charles Schwab stands to benefit from the sweeping tax reform signed into law late last week, with the company's Chief Financial Officer Peter Crawford saying that the benefits from the overhaul of the tax code will be "meaningful" to the discount brokerage.
In a blog post, Crawford said that The Charles Schwab Corporation (SCHW) has historically paid close to the full statutory federal corporate income tax rate, and with this rate being reduced, the company will stand to benefit in a big way. That is even with the new law disallowing some of the relevant deductions for the company. According to Crawford, the corporate rate of the San Francisco-based discount brokerage will drop from 35% to 21% starting in 2018.
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According to Crawford, the tax reform legislation will also result in a net deferred tax asset (DTA) repricing that could affect the fourth quarter. Certain parts of Schwab's income and expense items are sometimes recognized at different times on the tax return compared with the financial statements. That can result in DTAs and deferred tax liabilities (DTLs) based on the tax rate in the future recognition period. When the tax rate in the future period changes, Schwab and other financial firms have to re-evaluate their DTAs and DTLS. With the coming changes for 2018, Crawford said that the brokerage will have a DTA adjustment of around $40 million, which means a $40 million increase in its GAAP tax expense.
Another negative: Crawford said that, under the new tax bill, banks with more than $50 billion in assets can no longer deduct the FDIC insurance assessment, which the CFO said will "slightly" offset the reduction in Schwab's new tax rate. The company will not know the exact amount until each quarter, noted Crawford. "So, putting it all together, in 4Q 2017, we could see an increase in our tax expense (for GAAP purposes) of $40 million due to net deferred tax asset repricing. For 2018 and beyond, we estimate a net reduction in our tax rate of 11.5%-12.0% from this law," wrote the CFO.
Heading into the signing of the tax reform bill, expectations were high that Schwab would benefit if the bill received approval. Trefis.com, a platform created by a team of MIT engineers and Wall Street analysts that helps investors understand how companies' products affect share prices, recently said that Schwab's valuation could see a 20% increase from a reduction in the corporate tax rate. "The effective tax rate paid by Charles Schwab, around 37% in the past five years, is in fact much higher than that paid on average by other companies in the U.S.," Trefis wrote in a recent blog post for Forbes. The investment researchers estimate that Schwab's effective tax rate last year was 36.9%, with the firm paying taxes of $1.1 billion. If that rate were lowered to 22%, the tax liability would have declined to $660 million and increased the company's net income by close to 25%.