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Tax reform that cuts corporate tax rates could be what prompts PNC Financial Services Group Inc. to sell all or part of its 22 percent stake in BlackRock Inc.—something investors and market analysts have been speculating on for years.
“Right now with the statutory corporate tax rate at 35 percent, PNC cannot maximize the unrealized gains in their investment in a tax-efficient manner,” said Gerard Cassidy, managing director of equity research at RBC Capital Markets. The House GOP tax reform blueprint released last summer proposed lowering the corporate tax rate to 20 percent, and President Donald Trump has said that he wants to slash the rate to 15 percent.
“If you lower the corporate tax rate to 15 or 20 percent, PNC would then need to reexamine the potential benefit of selling that stake” because the company would be subject to a much lower tax on the gains it realizes by the sale, Cassidy told Bloomberg BNA.
The issue was raised during a July 14 call on PNC’s second-quarter earnings when John Pancari, senior managing director and a senior equity research analyst at Evercore Group LLC, asked if the company is factoring tax reform into whether it will sell the BlackRock interest. Given the expectations around potential tax reform, “there is still a lot of interest in what or how soon you could move on that if you decide to, and what you could do with the capital,” Pancari said.
In response, William S. Demchak, PNC president and CEO, said the company hasn’t made any firm decisions on what to do with the BlackRock stake, but that tax reform could play a role in those decisions.
“We’ll wait and see, obviously, if there was some form of tax reform at the margin that would help us, should we be interested in moving the position. But we haven’t come to that conclusion; it’s been a good investment and we get a good return on capital and they are a great company,” Demchak said. “So, as we’ve said before, we will be good stewards of capital and watch what happens as it relates to regulation capital requirements and tax policy and make decisions—informed decisions—when real things happen.”
Robert Willens, president of the tax and consulting firm Robert Willens LLC in New York, said Yahoo Inc. is in a similar spot with its substantial stake in Alibaba Group Holding Ltd.
PNC could also benefit from a lower rate because it has deferred tax liabilities on the BlackRock investment in its balance sheet, Cassidy said. A deferred tax liability is an income tax obligation arising from a temporary difference between tax accounting rules and standard accounting practices that is recorded on the business’s balance sheet and will be paid in a future accounting period.
PNC has been accruing deferred liabilities at a 35 percent effective rate, Cassidy said. “Therefore, if you were to lower the rate to 15 or 20 percent, that tax liability reserve is too large, and they obviously can bring it back into income.”
Willens agreed that a reduced tax rate would have a positive impact not only on PNC, but also on other companies with deferred tax liabilities. “If the rates went down, anybody with net deferred tax liabilities would get to reduce those liabilities, and whenever you do that, you have a corresponding amount of income that you can report.”
There are several reasons PNC may want to sell its BlackRock stake if it is able to do so in a tax-efficient way, analysts said.
If it sold the interest, “there would be some capital relief for the company because the investment is penalized by the regulators, and therefore the company would be able to reduce capital levels should they choose to sell it,” Cassidy said. Capital reduction can increase shareholder value, among other things.
Additionally, the company may make the judgment call that the BlackRock stock has reached its ceiling, in terms of how much it will appreciate, Eric Compton, an equity analyst at Morningstar Inc., told Bloomberg BNA.
If that’s the case, “in theory you’re only going to get average returns from here on out by holding it,” Compton said. “And so if you’ve already gotten the majority of your returns and now there’s a tax-efficient way to dispose of it, maybe it makes sense to get rid of that and refocus on your core banking operations.”
But that can be a tough judgment call, he said. Several years ago, people were telling PNC that its BlackRock stake had already achieved maximum gains, which ended up not being the case, Compton said. Holding on to the interest was a good call for the company, he said.
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