Buyback activity surged in the first quarter as some of the largest banking companies moved aggressively to bolster their share prices.
The top 25 bank holding companies bought back $5.1 billion of their own shares in the first quarter-the highest level in almost two years, according to statistics compiled by Keefe, Bruyette & Woods Inc.
Buyback volume was 49% higher in the first quarter than in the fourth quarter and 43% more than in the first quarter of 1998.
Analyst Marni Pont O'Doherty of Keefe said the activity could be attributed to the financial conglomerates that emerged from last year's merger wave with excess capital. Excess capital tends to depress return on equity, and buybacks can boost shareholder returns by reducing the number of outstanding shares.
"A lot of these guys are generating a lot of excess capital and buying back shares is the best way" to spend it, she said. "There were a lot of big companies in the market with a lot of firepower behind them."
Citigroup - formed last year in the merger of Travelers Group and Citicorp-was the largest repurchaser of its own shares in the first quarter and the fourth quarter, because of its options program. Stock options can increase outstanding shares and thereby dilute earnings per share.
Citigroup bought back $1 billion in the first quarter, down from $1.1 billion in the fourth.
Other big buyers in the first quarter included Chase Manhattan Corp., at $900 million, up from zero in the fourth quarter; National City Corp., which bought back $900 million, up from $340 million in the previous quarter; First Union Corp., $854 million, up from $618 million; Bank of New York Co., $315 million, up from $40 million; and PNC Bank Corp., $297 million, up from zero.
Last year, share repurchase activity occurred at a rate of under $3 billion a quarter. High stock prices, particularly in the early part of the year, made it expensive for banks to repurchase shares.
Merger mania also slowed buybacks. Banks involved in pooling-of-interest mergers are prohibited by the Securities and Exchange Commission from buying back their shares for six months after the transaction.
Analysts expected buyback activity to increase in 1999 but were surprised at the heady levels in the first quarter.
The deal values are "back to levels that we haven't seen in a long time," said Ms. O'Doherty. "And the buyback story is not over. Other companies that are tied up in mergers now will be able to buyback their shares."
Analysts expect companies such as BankAmerica Corp. and Wells Fargo & Co.-which are still in their six-month periods-to buy back in the near term.
Lawrence Cohn, bank analyst at Ryan, Beck & Co. pointed out that banks bought back shares when stock prices were fairly high. "Last year during fourth quarter it was obviously a better time to buy back bank stocks."
Mr. Cohn also said there is a downside to buybacks.
"Someday the cycle is going to turn, and when it does banks are going to start wishing that they had the capital that they thought was so excessive," he said.