Charles Schwab CFO Sees ‘Meaningful’ Benefits From U.S. Tax Reform

Shares of Charles Schwab (SCHW) are in focus after chief financial officer Peter Crawford issued commentary on the impacts of the U.S. tax reform. 

CFO COMMENTARY: On Friday, Charles Schwab CFO Peter Crawford said the tax reform legislation signed by President Donald Trump is expected to have “meaningful” benefits to the company as it previously paid near to the full statutory federal corporate income tax rate. He went on to outline key elements of the law expected to have an impact including net deferred tax asset repricing, corporate tax rate and deductions. He said, “When a future period’s tax rate changes, we are required to revalue our deferred tax assets and deferred tax liabilities to reflect the new tax value associated with the future income and expense items. The one-time repricing of these DTAs and DTLs occurs in the period that the law is enacted and is posted in the tax expense line of the income statement. Our DTAs are currently greater than our DTLs and we estimate that Schwab will have a net DTA adjustment of approximately $40M, with the actual amount dependent upon the final valuation of tax-sensitive balance sheet items as of the date of enactment,” adding, “Under the law, banks with over $50B in assets may no longer deduct FDIC insurance assessments, including both standard and surcharge assessments, starting in 2018. This will slightly offset the reduction in our statutory tax rate. We won’t know the exact amount until each quarter, when we actually compute and pay the assessments.” Crawford said the company may see an increase in tax expense of $40M in fourth quarter 2017 due to net DTA repricing but estimates a tax rate net reduction of 11.5%-12% for 2018 and beyond.

ANALYST REACTION: This morning, SunTrust analyst Douglas Mewhirter said the tax guidance provided by Charles Schwab’s CFO indicates potential for a substantial lift to 2018 earnings. The analyst, however, did lower his 4Q17 earnings per share estimate as the company is expected to take a “moderate hit” in the quarter. Mewhirter raised his 2018 EPS forecast for Charles Schwab to $2.35 from $1.99 and increased his price target on the shares to $63 from $56. The analyst, who said he is unsure how much of the tax cut was already priced into the current valuation, maintains a Buy rating on Charles Schwab shares.