The Rhode Island banking community has largely celebrated the sweeping tax overhaul approved by Congress that among other things lowered the corporate tax rate to 21 percent.
Now, as the dust settles, banks big and small are starting to decide what to do with the newfound money.
“We’re optimistic there should be a pretty good benefit [in 2018] from the overall tax reform and that should be pretty sustainable in our view,” said Bruce Van Saun, chairman and CEO of Citizens Financial Group Inc.
Following the enactment of the new law in December, banks – like other industries – felt an immediate impact depending on whether they carried deferred tax assets or deferred tax liabilities.
Banks with deferred tax liabilities, albeit a smaller proportion of the overall industry, largely benefited from one-time gains. Banks with deferred tax assets, meanwhile, suffered one-time losses.
Citizens Bank, the wholly owned subsidiary of Citizens Financial Group, carried deferred tax liabilities and was subsequently buoyed by a $331 million after-tax benefit, which helped boost 2017 profit 58.1 percent to $1.7 billion.
The largest Rhode Island-based bank decided to take about $22.5 million of the tax benefit and give $10 million to its charitable foundation and another $12.5 million to its employees in the form of $1,000 cash bonuses. The company – with $152.3 billion in assets – said the expense benefited about 12,500 employees, representing about 70 percent of its workforce.
“[It] was the right thing to do,” Van Saun told investors on a conference call after the bank reported its year-end earnings in January.
A similar trend played out at other financial institutions throughout the region, including Washington Trust Bancorp Inc., parent of The Washington Trust Co., and Webster Financial Corp., parent of Webster Bank.
“As soon as the bill was enacted, banks of all sizes began announcing ways they will put their tax savings to work for their employees, customers and communities, including increased wages and expanded philanthropic efforts,” according to the American Bankers Association.
The reinvestments into the workforce and charitable foundations – heralded in press releases and splashy announcements – however, are relatively small portions of the overall benefits. By example, the $22.5 million investment made by Citizens represented 6.8 percent of its total $331 million after-tax gain on deferred tax liabilities.
So, where’s the rest of the money going?
“In the near term, most of the tax benefit flows through,” Van Saun told investors.
Indeed, like other industries, the benefits of the tax overhaul will largely benefit bank shareholders. From boosted dividends to stock buybacks, companies throughout the country have already begun to announce various capital-building and profit-boosting strategies.
Wells Fargo & Co., for instance, announced a 350 million share buyback on Jan. 23, which represents about 7 percent of its total outstanding shares.
How long shareholders will enjoy such effects of the tax overhaul, however, is tough to tell, as banks are also watching one another closely to see whether the extra money gets reinvested in ways that could impact the competitive market.
‘The question over time is what happens in the marketplace to … our peers.’
BRUCE VAN SAUN, Citizens Financial Group Inc. CEO and chairman
“The question over time is what happens in the marketplace to some of our peers,” Van Saun said.
Van Saun described a hypothetical scenario in which banks would start using some of the newfound money to become more aggressive on offering more-favorable loan terms, which could in turn force others in the industry to react and possibly follow.
The impact could take away from the bottom line and thus the benefit to shareholders.
“Over time, you might see a little bit of [the benefit] competed away,” he said.
Unlike Citizens, Washington Trust carried deferred tax assets, which resulted in a one-time noncash tax expense of $6.2 million.
Despite the hit, the second-largest Rhode Island-based bank likewise gave full-time employees one-time cash bonuses of $1,000 and part-time employees $500 cash bonuses. The bonuses benefited about 70 percent of the company’s 600 employees, according to the bank.
Additionally, about 40 percent of employees received a $1 per hour increase in pay.
Edward “Ned” O. Handy III, the new chairman and CEO of Washington Trust, said the investment into its employees cost about $1 million. Moving forward, the bank will try to spread out the tax benefit, which executives estimate could total in the range of $8 million.
“It’s going to be a balance between rebuilding capital and being thoughtful about how much should be earmarked for our shareholders and how much we can reinvest in the business,” Handy said.
A growing expense for all banks has also been in the realm of technology, as customers increasingly demand financial products be more accessible using smartphones. Both Van Saun and Handy said technology investments are already being made at reasonable rates each year but that the tax benefit could help expedite such efforts.
“Looking at our overall technology, I think, we’ve been funding it at a very good clip,” Van Saun said. “We might try to get a few things through a little faster, but I think it’s really at the margin.”
