The Federal Reserve’s steady increase in the federal funds rate it charges banks to borrow money will translate to higher rates in 2018 for business borrowers, consumer credit cards, and bank deposits (remember those?) Meanwhile, most financial companies will enjoy markedly lower taxes, enabling them to lend more — or reward shareholders — under the tax bill passed by Congress and approved by President Trump.
Home purchase and car loan rates will also rise, but probably not as much as credit cards, with 30-year fixed-rate mortgages dipping below their recent average of about 4 percent before ending 2018 around 4.5 percent, predicts Greg McBride, chief financial analyst at New York-based Bankrate.com. Home loan rates haven’t always risen in step with Fed rates, due in part to weak demand in some parts of the country. McBride sees the average credit card rate by the end of 2018 above 17 percent, home equity lines of credit at nearly 6 percent, matching the likely Fed rate hikes.
More expensive money will also likely translate to higher bond yields, which may attract more investors to new issues and away from the hedge-fund and private-equity investments that public pension funds and other institutional investors bought in the 2000s and early 2010s to try and boost lagging returns.
Bankers expect the Fed will again raise the key rate, from last month’s 1.5 percent, three more times this year, just as it did in 2017. That compares to once each in 2015 and 2014. The rate was flat at a rock-bottom 0.25 percent from 2009 to 2014, when the Fed hoped cheap that money would help keep the economy from falling into recession again.
As to bank savings rates, “the best savings accounts will yield about 2.3 percent, and the top 5-year certificates of deposit should be just over 3 percent,” though averages will be less, McBride adds. “It’s really important to shop around.”
Banks and other financial companies will enjoy “significantly” higher profits thanks to the federal corporate income tax cuts, notes analyst Frederick Cannon, in a Tuesday report to clients of investment bank Keefe Bruyette & Woods in New York. Bank stocks rose sharply last fall, indicating that the “benefit of the tax bill was factored into the market prior to its final passage” in December, Cannon added.
One of the biggest beneficiaries of the tax bill is Bank of America Corp., which expects to earn more than $16 billion in taxable profits for 2017. Cannon says the federal income tax cuts shaved BofA’s effective tax rate to 19.5 percent, from an estimated 32 percent, saving the company more than $2 billion.
Rival Wells Fargo should see taxes drop to 20 percent, from 33 percent; Goldman Sachs, to 17 from 28; PNC, to 17 from 26; Citizens Bank of Pennsylvania owner Citizens Financial Group, to 21 from 33. Among Philadelphia-area lenders: M&T Bank’s tax rate would drop to 24 percent from 35 percent; WSFS, to 23 from 35; Univest, to 18 from 27; Bryn Mawr Trust, to 21 from 33; Beneficial, to 23 from 36. And, Vernon Hill’s First Republic Bank, to 18 percent, from 25 percent; Jay Sidhu’s Customers Bank, to 25 from 38.
Among investment companies, Cannon estimates Oaks, Montgomery County-based SEI Investments’ tax rate will fall to 23 percent, from last year’s 37 percent; Nasdaq, whose futures and options business is based in Philadelphia, to 24 percent, from 31 percent.
Lincoln, the Radnor-based life insurer and annuity sales company, should see taxes fall to around 16 percent, from 23 percent. PHH, the Cherry Hill-based home lender, to 24, from 38; CBRE, the national commercial-properties broker and investor, to 22 from 29; Fannie Mae, the home-loan finance giant, to 22, from 34; Sallie Mae, the Wilmington-based student lender, to 31 from 39.
Most, but not all financial companies are enjoying a windfall. Chubb, the New York-based global property insurer with employment centers in Philadelphia and Warren, N.J., will see little change in its rate of around 16 percent, Cannon estimates. Analysts have predicted some insurers who in the past suffered storm losses, merger write-offs and other big charges will lose by not being able to write as much of the prior losses down against future profits.
What’s less clear is whether financial companies will plow their new profits into new loans and other sales, or give it to investors in the form of share buybacks and higher dividends.
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