The most popular capital management technique for banks grew unpopular at the end of last year.
Stock repurchase activity plummeted in the fourth quarter because of lofty bank stock prices and restrictions from recent acquisitions.
According to data provided by Keefe, Bruyette & Woods Inc., estimated share buyback volume at the top 25 banks fell to $3.1 billion in the quarter. That was off sharply from $4.8 billion in the third quarter, and less than a third of the $11.4 billion in repurchase activity in last year's first quarter.
Only a year ago stock repurchase programs were still touted as the best capital management technique a banker could use. Wall Street analysts praised buybacks, investors coveted them, and bankers turned to them in droves.
By reducing a company's shares outstanding, buybacks automatically lift earnings per share-the single most important factor in a stock's value-and thus support the share price.
Though the strategy has had a few doubters, most analysts felt it was far better for most banks to buy back stock than deploy excess capital in riskier enterprises such as real estate lending or acquisitions.
Buybacks began to lose their appeal, however, as bank stock prices shot into the stratosphere. Last year the Standard & Poor's bank index rose 25%, making most bank stocks too expensive for their own issuers to repurchase on a reasonable economic basis.
Still, banking industry analyst Thomas Theurkauf at Keefe Bruyette emphasized that the falloff in repurchase activity since last year's first quarter should be viewed in context.
"In the early part of 1997 banks were flush with capital because they had issued billions of dollars in trust-preferred securities," said Mr. Theurkauf. "Banks then took the proceeds and bought common equity, which is what caused the high bounce in the first quarter."
He also noted that banks such as Fleet Financial Group, NationsBank Corp., National City Corp., and U.S. Bancorp halted buyback activity during the fourth quarter because of pooling-of-interest acquisitions. Such deals prevent banks for a while from buying back their own shares.
BankBoston Corp. has also been inactive, because it has been focusing its excess capital on higher-growth areas, particularly Latin America, the analyst said.
But in spite of the fourth-quarter drop in activity, buyback programs will "continue to be a permanent part of the landscape of banking," said Mr. Theurkauf.
Indeed, some banks have kept on repurchasing their shares in spite of lofty prices. In the fourth quarter Citicorp repurchased $800 million of its own stock, BankAmerica Corp. $550 million, PNC Corp. $300 million, Bank of New York $300 million, and Wells Fargo & Co. $250 million.
Most of the activity by these banks was either flat or slightly up from the third quarter.
As for the future, some market experts predict that bank repurchase programs are likely to increase again in the coming year.
Mark T. Fitzgibbon, associate director and analyst at Sandler O'Neil & Partners, noted that the recent selloff in banking stocks could make buyback programs more attractive. That could be particularly true for community banks and thrifts, which also curtailed their buyback activity as last year closed.
Mr. Fitzgibbon also pointed out that repurchasing shares is likely to become popular again because other capital management strategies no longer look attractive as the yield curve flattens.
Redeploying excess capital through acquisitions also will become difficult as stock prices and price-to-earnings multiples shrink.
Critics of repurchasing shares, however, said that any increase would eventually be harmful to banks.
"If banks want to grow earnings ... they have to increase capital in order to support a loan portfolio," said Richard X. Bove of Raymond James & Associates in St. Petersburg, Fla. "You can't do that if you are dealing with stock buybacks."
Already, Mr. Bove pointed out that "some banks look like they will not be able to fulfill their buyback promises."
