Banks After Tax Cuts: Loan Growth Slows and 3,200 Jobs Disappear

(Bloomberg) -- Banks were among the top beneficiaries when Republicans slashed corporate taxes in December to stoke the U.S. economy. So how are the nation’s largest financial institutions treating employees, customers and investors?

Twenty-three firms deemed most important by the Federal Reserve saved, on average, $388 million each in the first half of this year, based on declines in their reported tax rates. Over the same period, members of the group said they collectively eliminated 3,200 jobs.

Banks After Tax Cuts: Loan Growth Slows and 3,200 Jobs Disappear

Lending, their main contribution to the economy, rose 0.9 percent in the first half. But a year earlier -- before the tax cuts -- the growth rate was twice that.

Shareholders were the huge winners. After profits climbed during the first six months, firms signaled plans to boost dividends and other payouts by more than $28 billion through mid-2019.

The numbers provide an initial snapshot of how major banks are responding to their windfall. But as executives across the industry posted financial results in recent weeks, many cautioned they’re still figuring out how the tax cuts will ultimately play out. Some customers, for example, don’t need as much financing at the moment, because they just got tax cuts of their own.

“They used that liquidity to really make investments versus borrowing from us,” said David Turner, chief financial officer at Regions Financial Corp., the largest bank in Alabama. “We’re OK with the delayed loan growth. We think it’ll pick up as the economy continues to recover.”

Regions used some of its increased earnings from tax relief to increase its dividend, share buybacks and the minimum wage paid to staff. Other banks including JPMorgan Chase & Co. have also laid out targets for sharing the wealth.

In fact, there’s evidence many bankers and support staff are faring better -- assuming they weren’t fired. Personnel expenses increased by an average of 5.9 percent at the banks -- roughly in line with their increase in total revenue. So the average worker probably got a raise. Still, the majority of banks -- 14 of the 23 -- allocated a smaller slice of revenue to worker pay than last year, showing they aren’t necessarily sharing their windfall.

President Donald Trump signed the tax changes into law in December, driving down the corporate rate to 21 percent from 35 percent. Banks stood to benefit more because their effective rates had typically been higher than those paid by non-financial companies. In other words, their bills had more room to fall.

The 23 banks examined by Bloomberg are those based in the U.S. that are subject to the Fed’s annual stress tests. Companies in that group typically announce their plans for future dividends shortly after the regulator completes the exams in late June. All but four disclose quarterly changes in headcount.

Record Profits

Lower tax rates helped the nation’s six giant banks -- JPMorgan, Bank of America Corp., Wells Fargo & Co., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley -- churn out more than $29 billion in net income in each of this year’s first two quarters, after never before surpassing $26 billion.

The firm planning to increase its capital payout most was Wells Fargo. The San Francisco-based lender is pouring cash into buybacks after the Fed imposed a cap on its assets because of bad behavior.

Some firms have said they’re still trying to anticipate the full impact of tax reform on their earnings. Goldman Sachs told analysts on a conference call last month that it isn’t yet sure what its tax rate will be for the full year. And at JPMorgan, which set an industry record for profit, finance chief Marianne Lake told analysts last month that it’s probably just the start.

“We’ve yet to see the full effect of tax reform flow through into profitability and free cash flow,” she said.

©2018 Bloomberg L.P.