The U.S. banking industry carried on with share repurchase activity in December 2020, which saw a few big banks announce new buybacks after an easing of regulatory restrictions.
Analysts expect more buyback announcements in the coming weeks as banks announce their quarterly earnings, which are broadly expected to show a more optimistic outlook from lenders.
JPMorgan Chase & Co., the biggest U.S. bank by assets, announced a share repurchase program of $30 billion shortly after the Federal Reserve announced it would once again let banks buy back limited amounts of their shares. JPMorgan and other major banks had voluntarily paused their buyback programs in March, though the Fed later put a formal ban on big banks' repurchases for the remainder of the year.
Fed officials took analysts by surprise in their December 2020 decision by easing off on their limitations, a move that some criticized as premature given that it would lower banks' capital levels even as the virus continues to rage.
"We're still in the midst of a global pandemic. The future economic situation is highly uncertain," said Jeremy Kress, a former Fed lawyer who now teaches at the University of Michigan. Regulators, he added, should also be placing limits on buybacks for smaller banks given that they are more likely to be exposed to losses in the commercial real estate sector.
Banks, however, have carried on with announcing new buybacks. Twenty-six institutions laid out new share repurchase programs in December, while First US Bancshares Inc. announced an extension of its buybacks and Bankwell Financial Group Inc. reinstated theirs.
Two other big banks that were previously subject to the Fed's prohibition announced a new round of buybacks in December: Truist Financial Corp. and U.S. Bancorp. But like all other big banks, the Fed will limit their repurchases based on their income over the past year.
The Fed's conditional all-clear is expected to lead to a flurry of buyback announcements from big banks and smaller regional peers, all of whom will report their quarterly earnings in the next few weeks.
Peter Winter, an analyst at Wedbush Securities, wrote in a Jan. 8 note to clients that he expects Fifth Third Bancorp and KeyCorp to opt for more buybacks. Two "wildcards" are Citizens Financial Group Inc. and Regions Financial Corp., the latter of which has indicated it wants to build up its common equity Tier 1 capital ratio to 10% first. Its CET1 ratio stood at 9.32% at the end of the third quarter of 2020.
The restart of repurchase activity should also trickle down to other regional banks that are not large enough to be subject to the Fed's capital planning processes for big banks.
Two such candidates are Comerica Inc. and Zions Bancorp. NA, which had voluntarily suspended buybacks but will likely follow the lead of their larger peers, Winter wrote.
Others that could look to restart buybacks include BankUnited Inc. and East West Bancorp Inc., according to David Rochester, an analyst at Compass Point Research & Trading.
Analysts are particularly curious to hear from M&T Bank Corp., whose performance in the Fed's stress tests surprised to the downside. The Fed's severely adverse hypothetical stress scenario found that its domestic commercial real estate losses would add up to $6 billion, up from $2.2 billion in the June stress tests. The December stress tests indicated that its CET1 ratio would bottom out at 5%, compared to 8.5% in the June stress tests.
But the new fiscal relief package and improved economic backdrop should help the bank's credit outlook, Rochester wrote.
"Despite the strange material increase in the CET1 ratio hits in [the stress tests], we expect management to note an interest in buybacks, and we expect MTB will ultimately restart these in [the first quarter], given the decent capacity for MTB to do so under the extended Fed capital deployment net income restriction," he wrote.