US tax legislation weighs on Interactive Brokers’ earnings in Q4 2017

Maria Nikolova

As a result of the Tax Act, the fourth quarter results include a net reduction in consolidated earnings of approximately $84 million.

The latest changes in the United States tax legislation dented profits at electronic trading major Interactive Brokers Group, Inc. (NASDAQ:IBKR) in the fourth quarter of 2017. The company has just posted its key metrics for the final quarter of 2017, with the Tax Cuts and Jobs Act (the “Tax Act”), enacted on December 22, 2017, having decreased diluted earnings per share by $0.45.

The company notes that the Tax Act reduces the corporate income tax rate to 21% and implements a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries.

As a result of the Tax Act, the fourth quarter of 2017 includes a net reduction in consolidated earnings of approximately $84 million, of which $62 million is due to the one-time repatriation tax and a net $22 million is related to the remeasurement of U.S. deferred tax assets at lower enacted corporate tax rates.

Excluding other comprehensive income, the Company reported a diluted loss per share of $0.02 for the quarter, compared to diluted earnings per share of $0.07 for the same period in 2016.

Trading gains dropped by 64% from the fourth quarter a year earlier due to lower market making trading volumes as Interactive Brokers completed the transfer of its US options market making business to Two Sigma Securities, LLC in the third quarter of 2017.

On the brighter side, net revenues in the final quarter of 2017 were $515 million and income before income taxes was $364 million during the quarter, markedly up from net revenues of $193 million and income before income taxes of $28 million for the same period in 2016. The results for the quarter were positively impacted by strong growth in net interest income, which increased $66 million, or 48%, and higher commissions, which increased $20 million, or 13% from the year-ago quarter.

The results for the fourth quarter of 2017 include a $6 million gain on Interactive Brokers’ currency diversification strategy, compared to a $152 million loss in the same period in 2016; and a $9 million net mark-to-market loss on Interactive Brokers’ U.S. government securities portfolio, compared to an $11 million net mark-to-market loss in the same period in 2016.

Regarding the full year to December 31, 2017, comprehensive diluted earnings per share amounted to $1.22, compared to comprehensive diluted earnings per share of $1.19 in 2016. Excluding other comprehensive income, Interactive Brokers reported diluted earnings per share of $1.07 for 2017, compared to diluted earnings per share of $1.25 in 2016. The results for 2017 were negatively impacted by the effects of the Tax Act, which decreased diluted earnings per share by $0.46. Net revenues were $1,702 million and income before income taxes was $1,049 million for 2017, compared to net revenues of $1,396 million and income before income taxes of $761 million in 2016.

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