Almost everyone is cheering the implementation of the new tax law. But this will have an adverse near-term impact on financial performance of some companies. One such bank, Capital One Financial COF, is reducing its share repurchase authorization owing to this.
In a recent regulatory filing, Capital One disclosed that its board of directors has lowered repurchase authorization to up to $1 billion for Jun 30, 2018 time period (from the prior $1.85 billion authorization). The company resubmitted its 2017 capital plan as required by the Fed to address certain weaknesses in its capital planning process.
How lower share buyback authorization and tax act are connected? Well, the company’s financial position is expected to be hit by potential “reduction in the carrying value of certain tax assets and additional tax expenses resulting from the Tax Act.”
Capital One, at present, projects that the tax act will likely lead to nearly $1.9 billion charges in fourth-quarter 2017. The non-recurring expenses are mainly due to write-down in deferred tax assets (DTAs) (driven by reduction in corporate tax rate to 21%) and one-time tax on the company’s “unrepatriated” overseas earnings.
This one-time charge represents a significant portion of Capital One’s profits. For the nine months ended Sep 30, 2017, the company’s net income was $3 billion. So, the charge may substantially wipe out the company’s profits this year.
Some big banks like Bank of America BAC and Citigroup C have also noted that the tax act will likely result in significant one-time charges. BofA expects to record $3 billion charge in the fourth quarter while Citigroup anticipates taking $20 billion hit on earnings owing to write-down on DTAs.
Still, the tax act is projected to be beneficial to the banks over the long term. Also, several smaller banks including Washington Federal, Inc. WAFD and Texas Capital Bancshares, Inc. plan to upgrade technology and may even pass on the benefits to their employees in form of pay rise and one-time bonus. (Read more: Christmas Comes Early for Bank Stocks: Tax Reform Bill Passed)
Similarly for Capital One, this adverse impact is a one-time thing and the company will gain over the long run from higher earnings and increase in capital deployment plans.
Shares of Capital One have rallied 14.5% year to date, outperforming the industry’s gain of 7.6%.
Currently, Capital One carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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