The recent Tax Cuts and Jobs Act brings several changes for the new year. The significant lowering of the corporate tax rate may provide new opportunities for many banks, however the direct impact on your commercial pricing discussions may not be easily recognizable.
In this 30-minute webinar, Joel Rosenberg, CFA Managing Director and Scott Morgan, Managing Director share:
- How to update tax rates within PrecisionLender
- Ideas on how to measure the impact these changes will have on your pricing discussions
- Strategies banks are using to turn the tax savings into increased profits and future loan growth
You can download a PDF of this information here, or continue reading below.
The Tax Cuts and Jobs Act has given banks different paths to consider in 2018. Banks may want to pursue one of the two options recapped below, or some blend of both options.
These formulas were shared during the PrecisionLender University “Tax Cuts and Jobs Act” webinar, found above. If you have any questions, please contact your client success manager.
Retain increased profitability for bank shareholders
If your institution wants to retain the increase in profitability a tax rate adjustment would generate, you should increase your target ROE. The following formula can be used to determine the appropriate target once you’ve adjusted your tax rate.
For illustrative purposes, assume a bank wants to retain all of the increase in profitability. This chart demonstrates the change in Target ROEs required if the federal tax rate were moved from 35% to 21%.
Pass along the tax savings to the borrower
If your institution chooses to make no change to your target ROE, you will be able to price more aggressively once the tax rate has been adjusted. Use the following formula to understand how much more aggressively you will be able to price with the new tax rate in place.
For illustrative purposes, this chart demonstrates the decrease in rate, or spread, for a bank moving from the 35% tax rate to the new 21% rate. Assuming no change to the Target ROE, pricing would decrease by 26-65 bps depending on Target and Equity to Average Asset position.
PrecisionLender makes no warranties of any kind, express or implied and shall not be liable for any action as a result of this guidance. As always, please consult with your own tax advisors regarding institution-specific impact.