Goldman’s Tax Wobble Is a Buying Opportunity

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Goldman Sachs


GS -2.14%

likes to be a little different. Its shareholders found that extended to the short-term impact of the tax bill.

Unlike its peers, the nature of the big, one-time accounting write-down it suffered isn’t mostly cosmetic—it will affect how much cash it can return over the next six months. In the long run, though, lower taxes will be a boon.

Citigroup

on Tuesday booked a $22 billion tax charge, due mostly to revaluations of its deferred tax assets. Fortunately for Citi, the hit to their key regulatory capital ratios was minor, thanks in part to the large amount of excess capital the bank holds. Citi said the write-down won’t affect its plans to return $60 billion of capital to shareholders through 2020.

Goldman is taking a smaller write-down of just $4.4 billion, but the impact on its shareholder payouts will be bigger thanks to its smaller balance sheet and leaner capital position. On Wednesday Goldman warned that its pace of share buybacks would be slower than normal through the first half of 2018. Shares fell nearly 3% in early-afternoon trading.

The critical regulatory gauge in this case appears to be the bank’s supplementary leverage ratio, a measure of total leverage. It fell to 5.8% at the end of 2017 from 6.1% three months earlier as a result of the charge.

That is still well above the Federal Reserve’s 3% minimum, but what matters is how it fares under the Fed’s hypothetical scenarios in annual stress tests simulating a sharp global downturn.

Last spring Goldman got through the Fed’s most severe scenario with a leverage ratio of a still comfortable 4.1%. The bank apparently didn’t want to take any chances during the next round of tests, though.

Chief Financial Officer

Martin Chavez

said the bank typically aims to buy back around $5 billion to $6 billion per annual stress-test period, which runs through June. In the first half of 2018 buybacks will be slower than what would be implied by that typical annual pace, he said.

This amounts to a substantial downgrade. Back in October, Goldman said it had been authorized by the Fed to buy back as much as $8.7 billion of shares over the 12 months through June 2018. So far, it has used up just $3.8 billion of that authorization.

This disappointment drove the decline in Goldman shares Wednesday. But, as Mr. Chavez rightly pointed out, Goldman still stands to benefit strongly from tax reform. That isn’t only from a lower tax rate itself but also from indirect effects such as stronger client activity.

Mergers and acquisitions, for instance, already began rebounding when outlines of the tax package became clear late last year. This probably benefits Goldman more than any other major bank thanks to their strong M&A franchise. Any near-term weakness could prove to be a buying opportunity.

Corrections & Amplifications
Goldman Sachs has bought back $3.8 billion of shares under a $8.7 billion share-repurchase authorization. An earlier version of this article incorrectly said it had bought back $2.9 billion. (Jan. 17, 2018)

Write to Aaron Back at aaron.back@wsj.com

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