CoreStates Financial Corp. has joined the growing list of banking companies facilitating share repurchase programs through short-selling of their own stock.
In the month after the Philadelphia superregional announced a 10% stock buyback program Oct. 15, the short interest in its stock jumped 289%, to 11,748,350 shares, according to data released by the New York Stock Exchange. That easily eclipsed any other bank.
The bulk of the rise in short activity, according to CoreStates spokesman Gary Bruton, came from an authorization by the bank's board of directors of a privately negotiated purchase of 8.8 million shares. The transaction was related to the buyback program, he said.
Investors who borrow and then sell shares short generally expect the stock's value to drop. They can then buy cheaper shares to cover their position and profit from the difference in price.
But increasingly, short-selling has also become an element in sophisticated financial maneuvering, including hedging. And recently, banks have found investors to help them in buyback transactions via short- selling.
In the past year Banc One Corp., Southern National Corp., Mercantile Bancorp., and Amsouth Bancorp. have negotiated deals involving short- selling to facilitate buyback programs.
"It's a new environment for banks," said Anthony Davis, bank analyst at Dean Witter Reynolds.
In most cases the banks borrow a block of shares from an investment bank willing to bear the risk of the shares' price fluctuations after they have been sold short. CoreStates declined to give any details about its transaction.
The Philadelphia company probably dealt in the huge block of its own shares because it was eager to show investors a commitment to its buyback program. In doing so, CoreStates was able to complete quickly and impressively about 40% of its planned share repurchases. It intends to buy 22 million shares by December 1997.
A fast start for its buyback effort was important to the company, analysts say. In what has been a boom year for many large banks' stocks, the share price at CoreStates has limped along between $40 and $45.
The company endured criticism for entering a dilutive merger with Meridian Bancorp, and executive turnover has been unusually high, said Charles M. Vincent, a banking industry analyst at PNC Institutional Investment.
But in the last six weeks, since the buyback started, the company's shares have not only outperformed the bull market but also outpaced other large banks by 28%, according to Claire Percarptio, bank analyst at Janney Montgomery Scott in Philadelphia. She attributed half the gain to the bull market and half to the buyback program.
In addition, Terrence Larsen, CoreStates' chairman and chief executive officer, calmed investor fears recently when he told analysts the company would not do another merger for at least a year, said Ms. Percarptio.
"They've had a lot to prove, and they're doing it," she said.
State Street Boston Corp. had the second-largest percentage increase in short interest, 125%, or 429,116 shares. Republic New York Corp. and Finova Group Inc. saw 94% increases.
The biggest decreases in short interest were at Commercial Federal Corp., down 61%, or 45,110 shares; Capital One Financial Corp., 49%, or 1,384,666 shares; and Great Western Financial Corp., 42%, or 1,951,786 shares.
