Music to investors’ ears: Banks will use tax cut to boost dividends
Executives of large banks told investors and analysts what they wanted to hear Friday when they said that much of the savings from the reduction in the corporate tax rate would be used to boost returns to shareholders.
During conference calls held to discuss fourth-quarter and 2017 earnings, senior leaders at JPMorgan Chase, Wells Fargo and PNC Financial Services Group all said that returning capital to shareholders — through higher dividend payments, expanded stock buyback programs or both — would be a top priority in 2018.
“Because we have a lower tax rate … if everything else stays equal, we'll have more [capital] to return,” to investors, PNC Chief Financial Officer Rob Reilly said during Friday’s conference call.
PNC estimates that its tax rate will fall to 17% this year, from roughly 26.8% in the third quarter of 2017. (Most banks’ fourth-quarter rates were skewed by one-time items related to the timing of the tax cut’s passage.)
JPMorgan Chief Financial Officer Marianne Lake said that while increasing payouts to investors is always a priority, it is reasonable to assume that those payouts will be larger now that the bank’s effective tax rate will drop to 19% in 2018, from 29.6% in last year’s third quarter. The decline in the tax rate is expected to boost the bank's profits by 14%, or roughly $3.5 billion, in 2018, according to Bloomberg.
“Our strategy on potentially continuing to see dividends increase and having repurchase programs that allow us to achieve our target ratio, that hasn’t changed,” Lake said. “It might just be a bigger dollar number.”
Bankers' comments were music to the ears of analysts, who have been eagerly waiting to hear how banks intend to spend their tax savings since President Trump signed the $1.5 trillion tax cut into law last month. One analyst on JPMorgan’s call described the tax cut as a “once-in-a-lifetime” corporate benefit.
Gerard Cassidy, an analyst at RBC Capital Markets, wondered if banks might use their tax savings to pay a special dividend.
“In the past there seemed to be some hesitancy [from regulators] to allow banks to do special dividends as part of the capital return,” Cassidy said during the PNC conference call. “What [are you] thinking if you kind of get the sign from the regulators that they would be supportive of that?”
William Demchak PNC’s chairman and CEO, declined to answer the question directly. "Rather than talk about special or non-special, I think the simple answer ... given price-to-book ratios ... our bias would be towards dividends versus buyback," he said.
Still, some analysts worried that banks might not be able to fully deliver on promises of higher capital returns. Their concern is that banks might “compete away” the extra cash flow by cutting loan rates to try to steal customers from rival banks.
John Pancari, an analyst at Evercore Group, asked PNC if itsr estimated 17% tax rate for 2018 was based on the assumption that none of the bank’s improved cash flow “gets competed away.”
“Listening to some of the banks talk about the competitive environment, it seems like there is going to be a longer-term risk that some of that benefit does erode over time,” Pancari said.
Reilly responded that it was too early to tell.
“Whether or not … the above-the-line numbers get reduced as a function of … lowering spreads or higher deposit costs, I think remains to be seen,” Reilly said.
Many banks, including PNC and Wells, have already said that they intend to use a portion of the savings to boost wages for employees and pay bonuses to workers who generally are not eligible for them. Lake said JPMorgan Chase will release details in the coming weeks on how it will use some of those savings to increase employee compensation, adding that it is drawing up plans on “thoughtful” and “sustainable” ways to invest in workers over the long term.
She also said that the company may offer subsidies for low-income borrowers and increase support for small businesses.
“They may feel a benefit sooner” than other customers, Lake said.
Bankers seemed optimistic that lower taxes would spur businesses to borrow more. The new tax law will add between 20 and 30 basis points to economic growth this year, JPMorgan said. Gross domestic product expanded at a rate of 3.3% at the end of the third quarter.
Still, they were reluctant to forecast loan growth rates.
“Our clients are still digesting the tax bill and, much like this rate cycle, we haven’t seen this movie before,” Lake said. “We’ll have to watch it play out.”
Demchak said it was too early to say when corporate loan demand would return, although in theory it should.
“Notwithstanding the fact that we're kind of at all-time-high leverage, particularly [for] investment-grade corporate America, this is going to generate cash flow that, at the margin, ought to help them,” Demchak said.
Wells Fargo is likely to prioritize the deployment of its increased capital to increase loan growth, Chief Financial Officer John Shrewsberry said during the call.
“There’s no M&A in our future that would be a use of capital that we could possibly imagine at this point,” he said.
Kristin Broughton and Kevin Wack contributed to this story.