Banks generally met or beat expectations for first-quarter earnings, but many resorted to aggressive financial engineering to do it.
Thirty-one of the top 44 banking companies reported earnings per share in line with or better than analysts' consensus estimates, according to Smith Barney Inc., although few exceeded these expectations by more than a cent or two. And even the banks that missed estimates fell short by only a penny or two.
That first-quarter earnings brought so few surprises speaks to how well banks have learned to tailor their balance sheets, analysts said.
The most popular way for banks to massage their earnings numbers was to buy back stock from investors. Repurchasing shares boosts earnings-per- share and increases demand for a stock. And last quarter banks bought back more shares than ever to get their earnings up to snuff.
"There was an explosion in buybacks," observed David S. Berry, director of research at Keefe, Bruyette & Woods Inc. Banks spent $11.5 billion on repurchasing shares from investors in the quarter, he said, compared with $6 billion in the fourth quarter.
NationsBank Corp. led the way, spending $3.3 billion on stock buybacks to help finance its purchase of Boatmen's Bancshares. But even without NationsBank's buyback blitzkrieg, it would still have been a record quarter for buybacks, Mr. Berry observed.
Other aggressive repurchasers included National City Corp., which bought five million shares from last December to early April, the Cleveland banking company reported.
And Chase Manhattan Corp. is buying its stock at such a pace that a $2.5 billion program due to expire in 1998 might be completed by the end of this year, said Smith Barney analyst Henry C. Dickson.
Chase's aggressive buyback helped offset the lowest revenues in three years from its corporate finance and loan syndication unit, Mr. Berry said.
Buybacks got a big push thanks to the rise of trust-preferred securities last year. Banks sold these securities to get inexpensive Tier 1 capital and used the proceeds, which are tax-deductible, to buy back common stock.
"It's a way to leverage your balance sheet without upsetting the regulators, even though everybody knows it's the case," said PaineWebber Inc. analyst Lawrence Cohn.
It is unlikely that banks will be able to continue using sales of trust- preferred securities in the same way, however. The Internal Revenue Service is questioning the favorable tax treatment these securities have received. And there is also a bill before Congress to eliminate their tax deductibility.
Even without trust-preferred securities, banks should remain on solid enough financial footing to continue their buybacks, although less aggressively than recently. Despite credit card chargeoff levels that were worse than Wall Street had expected, banks weren't showing any systemic financial weakness, Mr. Berry said.
Analysts are loath to speculate to what degree banks will buy back stock to massage earnings. But their 1997 earnings projections suggest they think banks can take the strategy only so far. Consensus estimates for 31 of the top 44 banks have been cut or maintained, according to Smith Barney.
The cuts reflect concerns about rising interest rates and a lack of confidence that banks will continue to buy back stock so aggressively.
"We remained quite concerned that many bank managements have been unwilling (though financially able) to buy back their stock at the elevated levels seen in the first quarter," Natwest Securities analyst Thomas D. McCandless wrote in a recent report. Sustaining share buybacks, he believes, will be a key factor in banks' maintaining earnings in 1997.
Meanwhile, bank stocks soared Tuesday. At the close, the S&P bank index was up 2.47%, well ahead of the broader S&P 500 index. Shares of Citicorp were up $3, to $105.50.