New era: How tax cuts will drive strategy in 2018 and beyond
January 21, 2018 7:30 PM
How tax cuts will drive strategy in 2018 and beyond
It’s the question that’s dominating fourth-quarter earnings calls.
What, analysts want to know, do banks plan to do with the substantial sums of money they’ll be saving each year now that the federal corporate tax rate has been slashed to 21%?
They especially want to know — even if they’ve been a little coy in the way they ask — if banks plan to return more capital to shareholders. To their delight, the answer has been a resounding yes. Investors and analysts are curious, too, if banks plan to accelerate expansion plans or invest more heavily in technology, or if they might be tempted to use the savings to lower rates on loans in an effort to steal business from rivals.
It’s all made for some spirited discussion about what the future of banking looks like in an era of lower taxes. Here are some of the most interesting things we’re hearing this earnings season.
What, analysts want to know, do banks plan to do with the substantial sums of money they’ll be saving each year now that the federal corporate tax rate has been slashed to 21%?
They especially want to know — even if they’ve been a little coy in the way they ask — if banks plan to return more capital to shareholders. To their delight, the answer has been a resounding yes. Investors and analysts are curious, too, if banks plan to accelerate expansion plans or invest more heavily in technology, or if they might be tempted to use the savings to lower rates on loans in an effort to steal business from rivals.
It’s all made for some spirited discussion about what the future of banking looks like in an era of lower taxes. Here are some of the most interesting things we’re hearing this earnings season.
Scott Eells/Bloomberg
Yes, higher dividend payouts are a top priority
Nearly every bank CEO was asked on earnings calls if he or she plans to use anticipated savings from the recent cut in the corporate tax rate to boost dividend payouts to investors, and nearly every CEO replied with an emphatic "yes."
KeyCorp Chairman and CEO Beth Mooney (above) told analysts Thursday that the Cleveland bank hopes to win approval from regulators to increase its payout ratio to 50% of earnings from the current 30%.
“We believe that is consistent with what is a good level of payout of stronger earnings for regional banks and also aligns with the interest [of] our shareholders and investors,” Mooney said.
Even Signature Bank in New York, which has never paid a dividend in its 18-year history, is looking to spread more of its wealth. CEO Joseph DePaolo said Thursday that the $43 billion-asset bank’s first priority is to share more profits with employees in the form of increased 401(k) matches and higher contributions to health care premiums. Then, without even being asked, he added: “For the first time, we're also going to consider instituting either a buyback program or paying a dividend. … It's going to depend upon the growth of the institution, but we are going to take that up seriously and make some decisions later on in the year.”
That was music to investors’ ears. Signature’s shares, which were down in early trading Thursday, rebounded quickly after the earnings call wrapped up, gaining 4% for the day to close at a record $153.44. The stock then climbed another 4% on Friday.
KeyCorp Chairman and CEO Beth Mooney (above) told analysts Thursday that the Cleveland bank hopes to win approval from regulators to increase its payout ratio to 50% of earnings from the current 30%.
“We believe that is consistent with what is a good level of payout of stronger earnings for regional banks and also aligns with the interest [of] our shareholders and investors,” Mooney said.
Even Signature Bank in New York, which has never paid a dividend in its 18-year history, is looking to spread more of its wealth. CEO Joseph DePaolo said Thursday that the $43 billion-asset bank’s first priority is to share more profits with employees in the form of increased 401(k) matches and higher contributions to health care premiums. Then, without even being asked, he added: “For the first time, we're also going to consider instituting either a buyback program or paying a dividend. … It's going to depend upon the growth of the institution, but we are going to take that up seriously and make some decisions later on in the year.”
That was music to investors’ ears. Signature’s shares, which were down in early trading Thursday, rebounded quickly after the earnings call wrapped up, gaining 4% for the day to close at a record $153.44. The stock then climbed another 4% on Friday.
Andrew Harrer/Bloomberg
No slowing down tech investments
On a number of earnings calls, banks revealed plans to use at least some of their savings from the tax cuts to make larger investments in technology that they hope, down the road, will improve efficiency and help them better compete for customers.
Regions Financial, for example, plans to continue investing in newer, smaller branches that feature video ATMs. Bank of America is continuing to invest in upgrades to its mobile apps and ATMs, even as it faces some pressure from investors to curb its spending.
Chairman and CEO Brian Moynihan (above) assured analysts that the investments will pay off and ultimately improve its operating leverage. For each new ATM that B of A installs, it has one fewer full-time branch employee to pay, Moynihan said. In total, the company has replaced about 3,400 ATMs over the past year with newer, more high-tech models.
U.S. Bancorp, meanwhile, expects to invest a sizable chunk of its tax savings into new technology initiatives, according to Chief Financial Officer Terry Dolan.
Many of the projects slated for investment are long-term initiatives that the company already had in place, such as plans to upgrade technology in consumer banking, corporate payments and merchant acquiring. During the fourth quarter, tech expenses at the company jumped nearly 7% from a year earlier to $254 million.
U.S. Bancorp expects expenses to increase by another 5% in 2018, partly as a result of the tax cut.
“It’s really given us an opportunity to accelerate [long-term initiatives] into a near-term horizon,” Dolan said.
Regions Financial, for example, plans to continue investing in newer, smaller branches that feature video ATMs. Bank of America is continuing to invest in upgrades to its mobile apps and ATMs, even as it faces some pressure from investors to curb its spending.
Chairman and CEO Brian Moynihan (above) assured analysts that the investments will pay off and ultimately improve its operating leverage. For each new ATM that B of A installs, it has one fewer full-time branch employee to pay, Moynihan said. In total, the company has replaced about 3,400 ATMs over the past year with newer, more high-tech models.
U.S. Bancorp, meanwhile, expects to invest a sizable chunk of its tax savings into new technology initiatives, according to Chief Financial Officer Terry Dolan.
Many of the projects slated for investment are long-term initiatives that the company already had in place, such as plans to upgrade technology in consumer banking, corporate payments and merchant acquiring. During the fourth quarter, tech expenses at the company jumped nearly 7% from a year earlier to $254 million.
U.S. Bancorp expects expenses to increase by another 5% in 2018, partly as a result of the tax cut.
“It’s really given us an opportunity to accelerate [long-term initiatives] into a near-term horizon,” Dolan said.
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Few takers on M&A
There are lots of reasons to assume that M&A is poised pick up in 2018. It’s looking more and more likely that Congress will raise the asset threshold for determining if a bank is systemically risky, and that would likely spur more dealmaking among smaller regionals. Competition for customers and quality loans is as fierce as ever, and an acquisition is a surefire way to meaningfully increase assets. Finally, with their stock prices soaring and recent tax cuts promising to significantly boost profits, banks certainly have the currency to do deals.
Yet, at least for now, regional banks seem more interested indigesting already-completed purchases or pursuing smaller business-line or fintech acquisitions than doing big, transformative deals. BB&T said it needs to focus on realizing the full value of two Pennsylvania banks it bought in 2015 and 2016 before pursuing new ones. KeyCorp has also said that it has little interest in bank acquisitions while still integrating its 2016 purchase of First Niagara Financial Group.
For now, both banks are focused on smaller deals aimed at boosting fee income or improving the customer experience. Key, in recent months, has acquired a boutique investment bank and the personal financial management firm HelloWallet, while BB&T hasearmarked $50 million to invest in or acquire emerging financial technology firms .
Other regionals, including Citizens Financial Group and M&T Bank, have expressed interest in buying wealth management firms.
One bank that does seem interested in whole-bank deals is Comerica, which last bought a bank in 2011. Asked on an earnings call if tax reform and potential regulatory relief would prompt the $71 billion-asset bank to pursue a sizable deal, Chairman and CEO Ralph Babb (above) said that Dallas-based Comerica has a “lot of opportunity to grow” within its existing markets.
“We are very happy with the footprint," he said. Texas and California "are some of the fastest-growing markets in the country. We would certainly look at any opportunities that came up and make an appropriate judgment as to whether that would accelerate the growth in our markets, but also add to and fit right in to the culture.”
Yet, at least for now, regional banks seem more interested in
For now, both banks are focused on smaller deals aimed at boosting fee income or improving the customer experience. Key, in recent months, has acquired a boutique investment bank and the personal financial management firm HelloWallet, while BB&T has
Other regionals, including Citizens Financial Group and M&T Bank, have expressed interest in buying wealth management firms.
One bank that does seem interested in whole-bank deals is Comerica, which last bought a bank in 2011. Asked on an earnings call if tax reform and potential regulatory relief would prompt the $71 billion-asset bank to pursue a sizable deal, Chairman and CEO Ralph Babb (above) said that Dallas-based Comerica has a “lot of opportunity to grow” within its existing markets.
“We are very happy with the footprint," he said. Texas and California "are some of the fastest-growing markets in the country. We would certainly look at any opportunities that came up and make an appropriate judgment as to whether that would accelerate the growth in our markets, but also add to and fit right in to the culture.”
A good time to broaden horizons
Apart from eyeing business-line acquisitions, many banks are looking to grow by doing what they already do well, but in new markets. BB&T, for example, is looking to expand its auto lending nationally, focusing chiefly on borrowers in the “middle of the near prime” market, said Chief Risk Officer Clarke Starnes III.
The company has also been making “high-quality real estate” loans across the country, Starnes said. Corporate lending and equipment leasing are others areas where BB&T expects to do more business. “You’ll see our loan growth … meaningfully increase” by midyear, CEO Kelly King said.
Signature Bank, a highly successful deposit-gatherer that currently only has branches in and around New York City, is now setting its sights on the West Coast, according to CEO Joseph DePaolo (above). “We don't want to give too much information at this time for competitive purposes, but we expect to be fully operating at least one West Coast office by yearend,” he said.
Some companies are also wading cautiously into new lines of business. Sallie Mae, for example, is usingsome of its windfall from the federal tax cut to accelerate its move into personal loans and credit cards.
The nation’s largest private student lender, formally known as SLM Corp., says it plans invest $20 million of its anticipated tax savings in those areas.
The company has also been making “high-quality real estate” loans across the country, Starnes said. Corporate lending and equipment leasing are others areas where BB&T expects to do more business. “You’ll see our loan growth … meaningfully increase” by midyear, CEO Kelly King said.
Signature Bank, a highly successful deposit-gatherer that currently only has branches in and around New York City, is now setting its sights on the West Coast, according to CEO Joseph DePaolo (above). “We don't want to give too much information at this time for competitive purposes, but we expect to be fully operating at least one West Coast office by yearend,” he said.
Some companies are also wading cautiously into new lines of business. Sallie Mae, for example, is using
The nation’s largest private student lender, formally known as SLM Corp., says it plans invest $20 million of its anticipated tax savings in those areas.
More branch closures (and doubts about the ‘universal’ model)
BB&T CEO Kelly King told analysts that the Winston-Salem, N.C., bank closed about 150 branches across its 15-state footprint last year and will shutter another 150 in 2018, as customers continue to migrate to digital channels. His counterpart at PNC Financial Services Group, William Demchak, said that the Pittsburgh company shuttered 100 branches last year and expects to close an equal amount in 2018.
Notably, some of the branches PNC expects to close are so-called “universal” branches that Demchak said have not lived up to expectations.
Many banks have been opening these smaller, open-concept branches in recent years to cut real estate costs and create more inviting spaces for customers seeking financial guidance. But Demchak (above) said that even the universal branches “are measured the same way as our other branches, and if they're not performing to expectations, we'll close those.” Simply put, he said, universal branches are not for everyone. “What we've learned is that the psychology and the method of interacting with our customers can be just as effective in our traditional branch format.”
Notably, some of the branches PNC expects to close are so-called “universal” branches that Demchak said have not lived up to expectations.
Many banks have been opening these smaller, open-concept branches in recent years to cut real estate costs and create more inviting spaces for customers seeking financial guidance. But Demchak (above) said that even the universal branches “are measured the same way as our other branches, and if they're not performing to expectations, we'll close those.” Simply put, he said, universal branches are not for everyone. “What we've learned is that the psychology and the method of interacting with our customers can be just as effective in our traditional branch format.”
C&I will rebound — eventually
Bankers have been saying for the better part of a year that a corporate tax cut would accelerate what has been tepid demand for commercial and industrial loans. Now that President Trump has signed into a law a broad restructuring of the tax code that lowers the corporate rate from 35% to 21%, bankers are saying “not so fast.”
Yes, the tax cut “should begin to change the trajectory” of C&I lending, SunTrust Banks Chairman and CEO Bill Rogers (above) said during a Jan. 19 conference call. But “the timing and slope are difficult to predict at this juncture.”
Executives at M&T Bank in Buffalo, N.Y., offered a similar take. “It’s hard to believe [tax reform] won’t have a positive impact,” Chief Financial Officer Darren King said during a conference call. “The question is more the timing of how quickly that happens. We’re not expecting a big uptick in the next quarter.”
Among the reasons commercial loan demand is likely to remain soft for at least the next few quarters is that many companies already “have record levels of liquidity” and don’t have much need to borrow, said David Duprey, the CFO at Comerica. It is also reasonable to assume that some companies will use their tax savings to pay down existing debt.
Still, while the C&I lending boom may not start as quickly as some had hoped, bankers still expect it to happen. Pinnacle Financial Partners in Nashville, Tenn., for example, plans to hire 64 C&I lenders or private banking advisers over the next five years to capitalize on demand, according to CEO Terry Turner.
On Wells Fargo’s earnings call on Jan. 12, CEO Tim Sloan said that business clients are extremely bullish about the direction of the economy. “I spent a lot of time in the last week and a half with commercial and corporate customers, and there’s a lot of optimism out there,” he said.
Yes, the tax cut “should begin to change the trajectory” of C&I lending, SunTrust Banks Chairman and CEO Bill Rogers (above) said during a Jan. 19 conference call. But “the timing and slope are difficult to predict at this juncture.”
Executives at M&T Bank in Buffalo, N.Y., offered a similar take. “It’s hard to believe [tax reform] won’t have a positive impact,” Chief Financial Officer Darren King said during a conference call. “The question is more the timing of how quickly that happens. We’re not expecting a big uptick in the next quarter.”
Among the reasons commercial loan demand is likely to remain soft for at least the next few quarters is that many companies already “have record levels of liquidity” and don’t have much need to borrow, said David Duprey, the CFO at Comerica. It is also reasonable to assume that some companies will use their tax savings to pay down existing debt.
Still, while the C&I lending boom may not start as quickly as some had hoped, bankers still expect it to happen. Pinnacle Financial Partners in Nashville, Tenn., for example, plans to hire 64 C&I lenders or private banking advisers over the next five years to capitalize on demand, according to CEO Terry Turner.
On Wells Fargo’s earnings call on Jan. 12, CEO Tim Sloan said that business clients are extremely bullish about the direction of the economy. “I spent a lot of time in the last week and a half with commercial and corporate customers, and there’s a lot of optimism out there,” he said.
All in on consumer lending
While C&I lending has been tepid, consumer lending has been a bright spot at many regional banks. That’s especially true at Regions Financial, where credit card loans increased 8% in the fourth quarter when compared with a year earlier and its point-of-sale loans climbed a whopping 58% to $1.4 billion.
Point-of-sale lending is a relatively new business line for Regions. It is one of several banks that partner with GreenSky Financial, a fast-growing fintech that makes point-of-sale loans at home improvement stores and has recently started offering loans for elective medical procedures through doctors and dentists.
Point-of-sale lending has become particularly popular with banks, and several are looking to expand their partnerships. Citizens Financial Group in Providence, R.I., currently has an arrangement with Apple to finance iPhone purchases and finances home security systems through a partnership with Vivent. CEO Bruce Van Saun (above) told analysts that Citizens likes this business and expects to announce similar partnerships in the year ahead.
Van Saun said that home equity lending is also a promising area of growth. Like most banks, Citizens has seen its home equity book shrink in recent years, but Van Saun said he expects that trend to begin to reverse in 2019, when the 10-year draw period on home equity lines of credit originated during the crisis ends. And though some experts have speculated that home equity loans couldlose their appeal now that interest on the loans is no longer deductible, Van Saun said Citizens intends to invest heavily in the business, believing it’s one way to attract more “mass affluent” customers.
Point-of-sale lending is a relatively new business line for Regions. It is one of several banks that partner with GreenSky Financial, a fast-growing fintech that makes point-of-sale loans at home improvement stores and has recently started offering loans for elective medical procedures through doctors and dentists.
Point-of-sale lending has become particularly popular with banks, and several are looking to expand their partnerships. Citizens Financial Group in Providence, R.I., currently has an arrangement with Apple to finance iPhone purchases and finances home security systems through a partnership with Vivent. CEO Bruce Van Saun (above) told analysts that Citizens likes this business and expects to announce similar partnerships in the year ahead.
Van Saun said that home equity lending is also a promising area of growth. Like most banks, Citizens has seen its home equity book shrink in recent years, but Van Saun said he expects that trend to begin to reverse in 2019, when the 10-year draw period on home equity lines of credit originated during the crisis ends. And though some experts have speculated that home equity loans could
