US Banks Saved $21 Billion Dollars With 2017 GOP Tax Cuts As They Cut Staff And Loaned Less

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The US Banks made out like bandits with the 2017 GOP tax cuts bill with a tax savings of $21 billion dollars which translated into the banks making major profits with a surge in payouts as they cut staff and loaned out less monies. Many of the major banks plan to cut more staff and  have signaled that there will be an increase in automation.

Since it has been only about a year since the 2017 tax cuts was implemented, it’s too soon to evaluate the full economic impact.

Here’s the rest of the story….

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On February 6, 2019, Ben Foldy of Bloomberg penned the following report, “U.S. Banks Win $21 Billion Trump Tax Windfall Then Cut Staff, Loaned Less”

Excerpts:

“Major U.S. banks shaved about $21 billion from their tax bills last year — almost double the IRS’s annual budget — as the industry benefited more than many others from the Republican tax overhaul.”

“By year-end, most of the nation’s largest lenders met or exceeded their initial predictions for tax savings. On average, the banks saw their effective tax rates fall below 19 percent from the roughly 28 percent they paid in 2016. And while the breaks set off a gusher of payouts to shareholders, firms cut thousands of jobs and saw their lending growth slow.”

Rate Expectations

“Four of the six largest U.S. banks paid less taxes than they projected in 2018”

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Note: Some rates diverged from banks’ initial forecasts due to accounting adjustments

“The tally is based on a review of financial results and commentary from the 23 U.S. banks the Federal Reserve deems most important to the nation’s economy in annual stress tests. Banks stood to benefit more from lower tax rates because their effective rates were typically higher than those paid by non-financial companies. In other words, their bills had more room to fall. They’re also among the first industries to post annual results.”

“While banks vowed to use a portion of their savings to reward employees, help needy communities and support small businesses, the magnitude of their break and how the money was divvied is likely to fuel debate over whether the law was an effective way to stoke the economy. The 23 firms boosted dividends and stock buybacks 23 percent, and they eliminated almost 4,300 jobs. A few have signaled plans to cut thousands more.”

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“The size of the tax savings is especially striking amid the heated debate in Washington over the national budget. The amount saved by banks is greater than NASA’s request for fiscal 2019, which would cover deep space exploration, orbital operations and other research. It’s more than double what the Federal Bureau of Investigation expects to spend fighting crime.”

“To estimate tax savings, Bloomberg applied tax rates that banks paid in 2016 to their pretax earnings last year. That’s because their rates in 2017 were skewed by billions of dollars in accounting adjustments as the new law took effect. Some banks fined-tuned the adjustments last year, potentially shifting the $21 billion figure by hundreds of millions of dollars.”

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Here’s a breakdown of how banks’ key constituencies fared after the tax break.

Employees

“The picture is mixed for staff. As tax cuts took effect, many firms vowed to share a portion of their savings with workers. Bank of America Corp., for example, announced $1,000 bonuses for about 145,000 employees last year. Wells Fargo & Co. was among lenders that boosted their minimum wage to $15 an hour.”

“Yet headcount at Bank of America dropped by almost 4,900 last year, and at Wells Fargo by about 4,000. The only bank that eliminated more was Citigroup Inc., with 5,000 gone. Banks rarely provide regional breakdowns, but press reports show at least some cuts occurred outside the U.S.”

“The impact of those reductions on the larger group’s combined workforce was blunted as others hired.”

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“Now, additional cuts are on the horizon: State Street Corp., which added employees last year, announced in January it will dismiss 1,500 people while automating operations. And Citigroup has indicated it may cut thousands of its technology and operations staff in the years ahead.”

“Tax cuts or not, the financial industry is shifting customers to mobile platforms and embracing new technologies to handle tasks. While lower taxes can ease the pressure to pare personnel costs, a number of firms have noted they’re spending more on automation.”

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Customers

“At best, corporate tax cuts had a muted impact on lending, the banks’ primary contribution to the economy. While the group of banks increased their total loan books 2.3 percent last year, that was slower than 3.6 percent a year earlier.”

“To be sure, lending is driven by demand from qualifying customers. Rising interest rates discouraged home sales and other activities. Corporate clients also got a tax break, leaving them more money to fund expansion without borrowing.”

“Commercial and industrial lending — which helps fuel job creation — was stagnant heading into the year before picking up in the final months. That’s a sign that tax reform helped sustain economic growth, said Peter Winter, who covers regional banks for Wedbush Securities Inc. “The credit quality is still very strong for the banks.”

Business Lending Shakes Loose

Commercial and investment lending grew in 2018 after a relatively flat 2017

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Seasonally-adjusted data from the 25 largest domestically-chartered banks.

“Banks have said the tax law will help them finance worthy causes. For example, as part of a $20 billion package of initiatives, JPMorgan Chase & Co. vowed to boost small-business lending and philanthropic investments. Wells Fargo promised to give $400 million to community groups and nonprofits last year and said it will divert some future profits to philanthropy, such as support for small businesses that can’t get traditional loans.”

Shareholders

“The biggest winners were shareholders. Tax savings contributed to a banner year for banks, with the 6 largest surpassing $120 billion in combined profits for the first time. Dividends and stock buybacks at the 23 lenders surged by an additional $28 billion from 2017 — even more than their tax savings.”

“Many banks won Fed permission in June stress tests to boost future payouts, which means investors haven’t yet received the full benefit. (Most companies disclosed how much they paid out last year, and for those that didn’t, Bloomberg calculated it based on their shares outstanding, their stated dividends, and for 2 banks, their commentary on buybacks.)”

Comparing Numbers

“Still, the KBW Bank Index of the nation’s largest lenders tumbled 20% last year. The surge in payouts underscored that banks have limited opportunities to keep expanding their businesses profitably. So, they’re pumping out cash. The bank index has rebounded 13 percent this year, helped by the payouts and record results.”

“Companies “don’t go and distribute cash to their shareholders in the form of buybacks or dividends if they have good investments to make of a long-term capital nature,” said Dan Alpert, a managing partner at Westwood Capital.”

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“The debate over payouts reignited this week after U.S. Senators Bernie Sanders and Chuck Schumer wrote in a NY Times op-ed that companies should spend more money on their workforce and expansion. Wall Street leaders including JPMorgan Chief Executive Officer Jamie Dimon have said shareholders steer the cash to other ventures that can use it better.”

“By midweek, former Goldman Sachs Group Inc. CEO Lloyd Blankfein was arguing with Sanders on Twitter.”

“The money doesn’t vanish,” Blankfein wrote. “It gets reinvested in higher growth businesses that boost the economy and jobs.”

Link to entire report: US Banks Win $21 Billion Trump Tax Windfall Then Cut StaffLoaned …

Read more: Here are the finance firms cutting jobs this year

Read more: What the predictions were for savings before the bill

3 comments

  1. Gronda, well done. This goes beyond banks. US companies benefitted going forward from a tax break creating a higher after tax profit margin that continues beyond 2018.

    And, yet companies treat this windfall as a one-time occurrence. They were supposed to invest more in their business and provide better raises. Some of that did occur, but it was not surprising to me and others that it was beneath expectations. Before he resigned, Gary Cohn asked CEOs if they would invest the money in their business and only a few raised their hands, surprising him.

    What did they do with the money? They bought back shares to prop up EPS for bonus determination. They gave one time bonuses and some pay increases.
    But, they treated this as a one time thing. It is not. Those who gave out these $1,000 bonuses to all did about as little as they could all for show.

    Getting back to banks, it was announced today that BB&T is buying SunTrust in merger of equals. Having more money from the tax cut is a factor. Sadly, mergers cause staff cuts. If we see more mergers, that may be a sign of CEOs trying to change the subject since the new EPS expectations are baked in. Keith

    Liked by 1 person

    • Dear Keith,

      All I can say is that these huge banking institutions had better not get into financial difficulties when the US economy starts to slow down in 2020 because there will be hell to pay if they think the US taxpayers and consumers will not raise their voices in opposition.

      They have created such a high level of disgust with the average American after their executives caused so much harm with the 2008 great recession. So many folks suffered greatly and have managed to barely survive those hard times where there’s no room for good will for these banking institutions.

      They will feel the pinch, the next time these banking executives go to the US Congress for a bail out.

      They will have to learn that their bottom line management style has consequences.

      Hugs, Gronda

      Like

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