Many banks could see their annual tax bills decline substantially if Congress makes good on its promise to slash corporate tax rates, but what will they do with all that money they expect to save?

Initially, banks are are likely to expand stock-buyback programs, boost dividend payouts to investors and pursue acquisitions of either business lines or other banks, according to industry experts.

Banks are also standing ready to increase lending to businesses. Over the last several months, bankers have said repeatedly that gridlock in Washington and general uncertainty about the direction of the economy has been stifling loan demand and they are counting heavily on tax cuts to encourage more business investment and, in turn, more borrowing.

Ed Wehmer, CEO of Wintrust Financial.
CEO Ed Wehmer said that Wintrust would likely plow the extra savings from a tax cut into lending because “our loan pipelines remain consistently strong.”

“We would put the extra revenue back into lending or into an expansion into new markets,” said Victor Pierson, chairman and CEO of the $999 million-asset Moody National Bank in Galveston, Texas. “The primary emphasis for us will be on growing our franchise.”

The current House and Senate proposals each would cut the corporate tax rate to 20% from 35%; in the House version, the cut would take effect next year, while the Senate’s proposal would delay it to 2019. The House may vote on its version as soon as Thursday, while a Senate committee continues to hash out the details of that chamber’s bill.

It is far from certain that a tax reform bill will be passed. House and Senate versions contain vastly different provisions that would need to be reconciled and the Senate's decision this week to include a repeal of a key provision of the Affordable Care Act in its bill has angered some moderate Republicans.

Still, if all sides can hammer out their differences and pass a bill, banks stand to be huge winners. The average income tax rate for all banks in the third quarter was 31.43%, according to BankRegData.com. However, income tax rates vary by bank, based on several variables, including the federal 35% rate, state tax rates, employee compensation and municipal bond holdings.

JPMorgan Chase, for example, reported an effective income tax rate of 29.6% in the third quarter, according to its 10-Q. Citigroup’s was 31.1% and Bank of America’s was 29%.

Accordingly, the estimated impact of a corporate tax cut would vary by bank, said Chris Marinac, an analyst at FIG Partners in Atlanta. He estimated that the $41 billion-asset Signature Bank in New York and the $27 billion-asset Wintrust Financial in Rosemont, Ill., both of which had higher-than-average tax rates in the third quarter, could see their earnings per share increase by more than 20% if corporate tax rates were lowered.

Wintrust CEO Ed Wehmer said on a third-quarter earnings call last month that his company is a “max taxpayer” that “would greatly benefit from the tax plan being discussed in D.C.”

He added that Wintrust would likely plow the extra savings from a tax cut into lending because “our loan pipelines remain consistently strong.”

Keith Cargill, the CEO of the $24 billion-asset Texas Capital Bancshares in Dallas, is among the bankers who have said that borrowing has been constrained by political gridlock and that a stimulus like a tax cut would be the shot in the arm that many businesses need to invest in their growth. On his bank’s earnings call last month he suggested that the economy would suffer if Congress fails to pass tax reform.

If negotiations drag on "it will cause companies that today are doing business to think again about how they choose to grow," Cargill said.

Some economists are skeptical of claims that the tax cuts will spur a wave of investment. With corporate profits at record highs, large companies in particular already have plenty of cash on hand to invest whenever they are ready. Moreover, companies themselves have been signaling that they are more interested in using anticipated tax savings to pay down debt or buy back stock than in investing in new factories or equipment or hire more workers.

Marinac at FIG Partners said that banks should probably not count on tax cuts leading to a surge in loan demand, at least not at the outset. For banks, the most likely benefit of a corporate tax cut is that it will allow them pay higher dividends and increase the size of share-repurchase programs.

"At the end of the day, the tax cut will flow to the bottom line in the form of higher dividends and stock buybacks," Marinac said.

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