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Stock Strategist Industry Reports

Tax Reform Could Be Boon for Financials, but Impact Is Uneven

Some financial sector firms could see valuations rise by over a third, while others would see minimal impact.

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Corporate tax reform would generally be a material positive for the financial sector, although we believe the benefit will not be evenly distributed. In our scenario analysis, the best-positioned companies could see their valuations increase as much as 35%, while other companies could see only a minimal impact. In our view, companies with economic moats will be better able to hold these gains. Further, companies with domestically focused operations and limited use of existing tax shields will see a stronger benefit. However, we also see knock-on effects that could shift market share and force corporate reorganizations.

U.S. corporations are currently taxed at a statutory rate of 35%, the highest among the Organization for Economic Co-operation and Development nations and one of the highest in the world. In addition, U.S. corporations face taxation at the state and local level at an average of approximately 4.1%. Moreover, the United States is the only country that has adopted a worldwide system of taxation. As such, U.S. corporations face the prospect of being taxed not only on their earnings related to U.S. domestic operations, but also for activity related to their subsidiaries overseas (less applicable credits for taxes paid to foreign nations). However, U.S. corporations can indefinitely defer taxes on their overseas earnings unless cash is repatriated to the U.S.

Brett Horn has a position in the following securities mentioned above: WFC. Find out about Morningstar’s editorial policies.

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