Goldman Sachs will slow the pace of stock buybacks after becoming the second of the major Wall Street firms to post a net loss because of early costs from a Republican tax break.
The lender's average repurchases of $5 billion to $6 billion a year remain "a fair expectation over the medium term," Chief Financial Officer Marty Chavez told investors on an earnings call Wednesday, but "given the capital impact from tax legislation, we do not expect to buy back at that pace in the first half of 2018."
Goldman's $4.4 billion charge related to the December law led to a net loss of $2.14 billion, or $5.51 a share, compared with profit of a little more than that a year earlier, the New York-based bank said in a statement. That included a $3.3 billion payment to cover a one-time levy of 15.5 percent on overseas cash and 8 percent on everything else as well as a $1.1 billion markdown on tax breaks from operating losses in previous years.
Such breaks have a lower value under the 21 percent top corporate tax rate set by the new tax law than under the 35 percent levy in effect previously.
"When you take a step back and think of the implications related to the new tax law, you can categorize them in two main buckets," Chavez said. While the direct impacts hurt the bank's bottom line in the last three months of the year, Goldman stands to benefit later as its effective tax rate falls to 24 percent.
Further in the future, "potential benefits could take many forms, including heightened merger and acquisition activity, increased financing volumes, or the most important indirect benefit to our business: economic growth," he said.
Chavez declined to specify how much Goldman might trim its buyback while waiting on such payoffs. The bank had already purchased about $3.76 billion of its shares from July through December, the first half of a yearly cycle that typically begins after the Federal Reserve completes annual stress tests to determine whether banks are healthy enough to withstand a financial shock after planned dividends and buybacks.
The reviews were instituted after the 2008 financial crisis, when many companies raised dividends, then required billions of dollars in government bailouts to keep their doors open. Since then, many banks have preferred to return capital to their investors through buybacks, since those are easier to pause than the quarterly payouts.
Excluding the tax bill, earnings of $5.68 a share at Goldman topped the $4.92 average estimate from analysts surveyed by FactSet as the firm maintained its top ranking in merger-advisory services while investment-banking revenue climbed 44 percent to $2.14 billion.
Investment banking's performance, driven partly by additional stock offerings from publicly-traded companies, "helped mitigate pressured trading results," Jason Goldberg, an analyst with Barclays Plc, said in a note to clients.
Indeed, bond- and commodity-trading tumbled 50 percent to $1 billion as the volatility that energized investors after President Donald Trump's surprise election in late 2016 fizzled. The results were worse than projected by Keefe, Bruyette & Woods analyst Brian Kleinhanzl, who anticipated a drop of only 31 percent.
Goldman dropped 1.9 percent to $253.65 in New York trading on Wednesday, paring its gain over the past year to 7.6 percent, trailing several of its competitors as well as the broader S&P 500.
