Magazine article American Banker

Skeptics Say Banks Have Gone Too Far in Buying Back Stock

Magazine article American Banker

Skeptics Say Banks Have Gone Too Far in Buying Back Stock

Article excerpt

Bank share repurchase programs are beginning to lose their allure for some Wall Street observers.

An increasing number of bond and equity analysts are raising questions about the programs in which banks distribute excess capital to shareholders by buying their stock rather than using it for loans or investments in their business.

These skeptics are concerned that the programs have gone too far, too fast. They argue that excessive use of the strategy could eventually thin capital ratios, disrupt earnings, and cause overleverage in some banks.

"Big banks have become cash-throw-off businesses," said Richard X. Bove, bank analyst at Raymond James & Associates, St. Petersburg, Fla. "If you repurchase stock you are shrinking your capital and limiting your ability to leverage your balance sheet."

The argument for bank repurchase programs is a strong one. By adopting the strategy, advocates say, banks are taking a disciplined approach, controlling their capital through a program that helps boost the stock price and earnings per share without adding to risk.

Former Vanguard portfolio manager John Neff, who soared to fame by investing in bank stocks, remarked recently that it is better for a bank to repurchase its stock at 12-times book value than to make imprudent loans.

Bankers clearly agree. According to Keefe, Bruyette & Woods Inc., the aggregate of stock repurchases by the 25 largest banking companies leapt to $5.8 billion in the fourth quarter of 1996, from $2 billion in the first quarter of 1995. And Keefe projected $7 billion of bank share repurchases during the current quarter.

But "there is a heightened sensitivity that repurchase plans without restraints are not helping the banking industry," said Arthur Loomis, president of Northeast Capital and Advisory Inc.

Mr. Loomis suggested some banks are repurchasing shares because their peers are doing it, not because it is right for their business strategies. …

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