Banking

Flush with capital, banks rush to repurchase stock

Share buyback programs, shelved by many banks early in 2020 amid pressure from regulators to preserve capital in the midst of a pandemic, are back in vogue, with three dozen banks announcing repurchase plans in April alone.

Most banks paused these programs a year ago because of the credit and economic uncertainty imposed by coronavirus outbreaks. The Federal Reserve required the nation’s biggest banks to freeze buybacks at the height of the pandemic and smaller banks followed their lead.

However, the Fed in December lifted the moratorium beginning in the first quarter of this year, mandating only that the purchases be less than banks’ average net income over the four previous quarters. JPMorgan Chase in New York, the largest U.S. bank with more than $3.7 trillion of assets, almost immediately announced a new share repurchase program of $30 billion.

Other big banks, including Bank of America, have since followed suit, as have a growing number of regional and community banks. “We’ll get back in the saddle” with buybacks, Brian Moynihan, chairman and CEO of the nearly $3 trillion-asset BofA, said on the company’s April earnings call. BofA announced a $25 billion repurchase plan last month.

Buybacks are important to investors they make up about 70% of the industry’s capital payouts to shareholders in a typical year, according to the Fed.

Banks are reinstating buyback programs because they are increasingly confident that the economy is poised to recover in 2021. Banks reported solid first quarter-profits and many are flush with capital, eager to return it to shareholders to reduce their outstanding stock and bolster earnings per share.

Share repurchases also should help offset the lingering net interest margin pressure most banks face while interest rates remain near record lows.

At least 36 banks announced new share repurchase plans in April, up from an estimated 22 in March and 28 in February, according to a tally by S&P Global Market Intelligence. Additionally, six banks announced buyback program expansions in April and two more extended existing plans.

Investors anticipate buyback activity to prove an important capital deployment theme throughout 2021.

“Banks are bringing down loan loss reserves and boosting profits,” said Robert Bolton, president of bank investor Iron Bay Capital in Rochester, New York. “With the pandemic potentially nearing an end and the economy looking strong in the second half of the year, banks that already have plenty of capital are going to generate more. A lot of them really see a need to have programs in place to return it to shareholders.”

Berkshire Hills Bancorp in Boston is among them. The bank said its capital levels are well above regulatory requirements as it launched a new plan in April to buy back up to 5% of its shares.

It “is a prudent course of action,” Nitin Mhatre, president and CEO of the $12.7 billion-asset company, said on an earnings call last month. “We absolutely think it’s a step in the right direction as we continue to look for ways to deploy capital that maximize shareholder value…That will be an ongoing process.”

Buybacks, through which companies repurchase their own shares on the open market, can also demonstrate management’s confidence in their company’s growth prospects.

“As an investor, you like to see management’s belief in the company,” Bolton said.

Holding excess capital, WesBanco in Wheeling, West Virginia, approved a plan in April to repurchase 2.5% of its shares.

“We’re cognizant of how much capital we’re carrying, and the capital is good because we have that strength. But from a shareholder-friendly perspective, we’ve also got to make sure we got the appropriate capital levels,” Todd Clossin, president and CEO of the $17 billion-asset bank, said on an April earnings call.

Michael Jamesson, a principal at bank consulting firm Jamesson Associates in Scottsville, New York, said banks commonly talk up the direct benefit of repurchases to shareholders: Reducing outstanding stock makes each remaining share potentially more valuable. While that is valid, he said, an equally important driver this year is the need to offset festering net interest margin pressure.

While the economy is heating up, he said, consumers and corporations overall are both holding more cash than they did prior to the pandemic. For most of this year, he said, Americans will make purchases and companies will invest in expansion with cash more often than in past years. Notably stronger loan demand may have to wait until the extra cash is put to work. That means banks’ traditional earnings could flatten out in coming quarters. Without loan volume, low interest rates will weigh on margins and banks’ profitability, he said.

Buying back shares, however, bolsters earnings per share and helps to counter margin pressure.
“You’ve got to find a way to offset the low rates,” Jamesson said.

For similar reasons, he said, many banks are simultaneously prepped for buybacks while hunting for acquisitions that can provide scale and cost savings to prop up bottom lines.

Count Allegiance Bancshares in Houston in that category. The $6.4 billion-asset bank announced a buyback plan in April. During the same month, Chief Financial Officer Paul Egge said on an earnings call that, while the company is poised for share repurchases, it also wants to be prudent on that front to preserve some capital for potential acquisitions.

The bank wants “to maintain a high level of flexibility for potential M&A activity,” Egge said.



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