Bank CEOs still have a lot of explaining to do about how they plan to use their newfound tax savings.

Over the past two weeks, banks across the industry have responded to the tax cuts passed by Congress and signed into law by President Trump by promising to increase wages and boost charitable contributions in 2018.

Those commitments, however, barely scratch the surface of what banks can do with the many millions, or even billions, of dollars they will be saving each year now that the corporate tax rate has been slashed to 21% from 35%. Banks have been in full cost-cutting mode in recent years, but with profits expected to increase substantially as a result of tax cuts, analysts say they are well-positioned to increase not just dividends or share buybacks, but also investments in technology that could improve the customer experience and adjust pricing to help attract new depositors and borrowers.

“The biggest question is going to be: How much of the tax benefit do you expect to fall to the bottom line versus getting competed away, or getting reinvested in other areas?” said Peter Winter, an analyst with Wedbush Securities.

Chart showing estimated earnings-per-share boost to big banks

With earnings season set to kick off next week, expect bank CEOs and other senior executives to face a barrage of questions during conference calls on how tax savings will be deployed in 2018 and beyond. JPMorgan Chase, Wells Fargo, and PNC Financial Services Group will kick off earnings season with analyst calls on Jan. 12.

Regional banks have already begun to signal their intention to use their savings for much-needed improvements in mobile and back-office technology, among other capital-intensive projects.

U.S. Bancorp in Minneapolis said this week that, in light of the tax cut, it plans to make additional investments in projects “centered on the customer experience with an emphasis on digital and mobile capabilities.” No additional details were provided.

Regions Financial in Birmingham, Ala., meanwhile, said it would increase its capital budget by $100 million, or 50%, to improve facilities and technology.

“I would expect on almost every call, an analyst will ask: ‘How has the corporate tax cut changed the competitive environment?’ ” said Emlen Harmon, an analyst with JMP Securities.

To describe the tax cut as a boon for banks would be something of an understatement.

For the industry’s biggest banks, earnings are expected to increase by between 10% and 20% over the next two years, according to recent reports from equity analysts.

In light of the windfall, several banks — Wells, Fifth Third Bancorp, PNC among others — raised their minimum wages to $15 and announced a series of one-time, $1,000 bonuses. The costs associated with those efforts, however, account for less than one-fifth of the tax benefit that banks are expected to receive in 2018, according to an analysis by Barclays.

One tack that banks may take in the months ahead is to adjust pricing on loans or deposits, to make a play for additional market share, according to Winter of Wedbush Securities.

That could be good news for savers, as deposit rates on most consumer accounts have barely budged, despite five rate hikes of 25 basis points from the Federal Reserve over the past two years.

The $10 billion-asset Customers Bancorp in Wyomissing, Pa., on Friday said it will use its tax savings to create a high-yielding checking account, with an interest rate of 2%. By comparison, rates on deposit accounts at bigger banks remain well below 1%.

Other banks have begun to boost deposit rates for commercial and wealth management customers.

Perhaps a bigger question facing the industry, however, is whether the tax cut will entice business customers to borrow more. Though rates for borrowers are already favorable, some analysts suggested that banks could use their tax savings to reduce rates on loans in hopes of gaining more market share.

Demand for commercial loan growth has taken a dive over the past year, baffling both executives and analysts. Weekly data from the Fed suggests that the deceleration continued into the fourth quarter, as commercial loans rose just 3.4% as of Dec. 22 from a year earlier, compared to 7% during the fourth quarter last year, according to a report from Wedbush.

The downturn in business lending has been particularly puzzling, given the relatively strong pace of economic growth. Some executives have explained the trend as a wave of commercial clients refinancing bank loans by taking advantage of low rates in the debt markets. Others have blamed uncertainty on the ongoing legislative gridlock in Congress.

“Has this changed commercial loan demand at all?” Harmon asked, describing a question bank CEOs are likely to face in the coming weeks.

Still, when banks begin reporting their results next week, expect a messy quarter as many will take significant, one-time charges related to the tax changes.

JPMorgan expects to take a $2 billion hit on foreign earnings that face taxation. Other banks, including Citigroup, Capital One and Goldman Sachs, have warned investors that they face adjustments of several billion dollars, due to writedowns on deferred tax assets.

In the near term, “you have to transition into that place where the tax rate is lower, and those transition adjustments … would be negative for us,” JPMorgan Chief Financial Officer Marianne Lake said Dec. 5 during a presentation at an industry conference.

Still, over the long term, the benefits of a tax cut will be significant — and at some point down the road, the New York bank will use them to gain an edge in the various markets in which it operates, Lake said.

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Kristin Broughton

Kristin Broughton

Kristin Broughton is a reporter for American Banker, where she writes about the business of national and regional banking.