Bank profits are expected to get a huge boost from the tax bill that cleared Congress Wednesday, and a handful of lenders plan to use some of the proceeds to increase employee wages.
San Francisco-based Wells Fargo & Co., Cincinnati-based Fifth Third Bancorp and Phoenix-based Western Alliance Bancorp said Wednesday they would use part of the tax-overhaul windfall to raise pay for lower-tier employees. The changes would go into effect once the bill is signed into law by President Donald Trump.
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Banks in the U.S. tend to pay relatively high tax rates, so they are expected to benefit more than other industries from the corporate-rate cut in the bill.
Goldman Sachs Group Inc. analysts estimated in December that the measures, which include a 21% corporate tax rate, would boost large bank earnings by about 13% in 2018. Smaller banks are expected to see similar gains.
"The bigger story on tax reform is, what are banks going to do with the capital?" said KBW analyst Christopher McGratty.
Most banks haven't yet detailed plans for spending that extra money. Barclays PLC analyst Jason Goldberg expects the majority of it to initially fall straight to banks' bottom lines, though he said some of the funds could be spent on costly technology initiatives and employee wages. The higher profits would likely mean increased dividends and share buybacks, which benefit shareholders, he added.
Wells Fargo & Co. announced plans to increase the minimum wage paid to employees to $15 an hour from $13.50 an hour. The bank also said it would donate to community and nonprofit organizations.
Fifth Third CFO Tayfun Tuzun said at an investor day meeting in early December that he expected the bank's effective tax rate to fall from about 26% or 27% to 12.5% or 13.5%. He also estimated that the bank would have a net gain of $240 million to $265 million.
Mr. Tuzun said at the time that he expected the majority of the bank's tax benefit to go to the bottom line. The bank said on Wednesday the pay raises would cost $23.6 million.
Fifth Third, among the nation's largest 30 banks with about $140 billion in assets, said it plans to raise its minimum hourly wage to $15 an hour, which will affect nearly 3,000 employees. It will also give more than 13,500 of its 18,000 employees a onetime $1,000 bonus.
Western Alliance, which has $20 billion in assets, plans to increase the base pay of the lowest-paid 50% of employees by 7.5% once the bill becomes law, the bank's chief executive Robert Sarver said in an interview Wednesday. Bonuses will also go up, bringing the total pay increase for this group of employees to around 10%. These employees generally make $75,000 or less.
Western Alliance, which operates units including Bank of Nevada and Torrey Pines Bank, also plans to increase its 401(k) match from 50% of an employee's contribution up to 6% of pay to 75% of an employee's contribution up to that same level. The bank, which has about 1,700 total employees, also plans to improve maternity leave benefits, though Mr. Sarver declined to detail those changes.
The pay and benefit increases will likely use up about 20% of the boost the bank will get from the tax plan, said Mr. Sarver, who is also the managing partner of the National Basketball Association's Phoenix Suns. The bank doesn't pay a dividend or buy back shares, Mr. Sarver said, so the rest will go to other measures like lending more.
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(END) Dow Jones Newswires
December 20, 2017 17:48 ET (22:48 GMT)