Bank buybacks are nowhere near pre-pandemic levels: New York Fed report

Share buybacks at banks are far below pre-pandemic levels, according to data released by the Federal Reserve Bank of New York this week.

Twenty-one of the country's 34 largest bank holding companies bought back just $6.5 billion of shares in the third quarter of 2022, the last quarter for which data is available. That was far below the $36.8 billion repurchased during the same period in 2019. 

Increasing economic uncertainty, lower-than-expected profit margins and a Federal Reserve set on rate hikes in the second half of last year prompted some banks to suspend buybacks in the hopes of building capital. At the same time, declines in bond yields held by banks in 2022 have reduced the funds banks have on hand to fuel share repurchases.

"While we are hoping for the best, we always remain vigilant and prepared for bad outcomes," JPMorgan Chase CEO Jamie Dimon said of the economic outlook when the bank announced its suspension of buybacks after reporting third-quarter earnings. Dimon said the bank hopes to be able to restart buybacks early in 2023. JPMorgan and other megabanks are scheduled Friday to report year-end results and will perhaps shed more light on their expectations for the year.

Many large, publicly traded banks voluntarily suspended buybacks in March 2020 to protect capital levels in case of significant losses during the pandemic. The Federal Reserve formally restricted payouts to shareholders, including buybacks and dividends, a few months later. After credit quality failed to deteriorate anywhere near worst-case scenarios in 2020, the Fed began lifting restrictions in 2021. 

"The banking system continues to be a source of strength, and returning to our normal framework after this year's stress tests will preserve that strength," Randal Quarles, then the Fed's vice chair for supervision, said in 2021.

Banks jumped at the chance to execute buybacks, which typically boost stock prices. Buybacks rose to $39.3 billion in the third quarter of 2021, the only period since the pandemic's onset when they have surpassed 2019 levels.

The resurgence was short-lived. Buybacks fell to their lowest level in almost a decade in the second quarter of 2022, when a darkening economic forecast spooked many banks from large share repurchases.

Stress tests

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Banks typically add to their capital levels when their earnings outpace funds paid out to shareholders. Big banks haven't just focused on reining in their buyback programs to build capital. They are also retreating from risk-weighted assets, or items in a bank's portfolio that require capital to be held in reserve.

Funds paid out via bank dividends also saw steep declines in the early months of the pandemic. But unlike buybacks, dividends have surpassed their pre-pandemic levels. Dividends paid by the group of largest banks in the third quarter of 2022 totaled $13.8 billion, up from $12.9 billion recorded during the same period in 2019.

The less volatile nature of dividends is in part because they account for a smaller share of payouts to shareholders than buybacks. Buybacks made up three-quarters of funds paid to shareholders in 2021, the recent peak for repurchases. Dividends accounted for just a quarter of shareholder payments at the time.