Investors to ex-SIFIs: Show us the excess capital

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When lawmakers freed small regional banks from the capital requirements for systemically important financial institutions, that opened up a whole new world for banks in terms of what they could do with that excess cash.

But early into second-quarter earnings season, there are so far more questions than answers on the subject of what to do with all that excess capital: Buybacks? Dividends? M&A deals?

That dynamic was on full display when the $70.5 billion-asset Comerica reported its quarterly earnings on Tuesday.


“We are well positioned to meaningfully increase our capital return to our shareholders,” Chairman and CEO Ralph Babb said on the Dallas company’s conference call, adding that its board of directors will meet next week to review its capital plan. Yet Babb also was not willing to tip his hand on any further details of how Comerica might deploy excess capital.

That finally prompted an analyst to press him, “Is there any explicit reason why you can’t be a little less opaque about the capital return process?”

Babb answered: “I think the reason for that is that it just happened, and we are getting used to it, and I think the regulatory environment is looking at it as well, and it takes a little bit of time for that to develop."

Smaller regionals will likely get some of those same questions as they post their second-quarter results this month, although few of them are expected to be interrogated quite like Comerica was.

In May, lawmakers raised the threshold for what constitutes a systemically important financial institution from $50 billion assets to $250 billion. Banks under $100 billion in assets were released from the stress testing and capital requirements expected of a SIFI, but banking regulators could still set new rules for banks with assets of $100 billion to $250 billion.

For now, investors may hold off on interrogating the banks over $100 billion on the capital question, at least until they get more clarity about how regulators will handle banks of that size, said R. Scott Siefers, an analyst with Sandler O’Neill.

But a few things also make Comerica an exception among that $50 billion-to-$100 billion asset group. For one thing, Comerica is starting from a fairly high capital level, Siefers said. At June 30, its common equity Tier 1 capital ratio stood at 11.90%. Comerica also has not had a lot of balance sheet growth to absorb that excess capital, he said.

“In the absence of concrete information about what these other banks plan to do with their excess capital or their overall capital plans, I would anticipate you’d see a similar level of interest among investors,” Siefers said. “But having said that, the capital story is always a little more unique with Comerica because they start out with so much and there’s not a lot of growth there.”

Adding to that, banks between $50 billion and $100 billion are a small group that includes Zions and SVB Financial, and not many of them were previously subject to the Comprehensive Capital Analysis and Review testing required by Dodd-Frank, said Marty Mosby, an analyst at Vining Sparks.

“What everybody is trying to grapple with Comerica is, when are they going to release, how are they going to release, how aggressive could they be,” he said. “That’s why Comerica is getting all the questions. They’re going to be the exception to the rule because everybody wasn’t required to be in the CCAR process.”

While Babb offered few concrete details about how the bank would spend its excess capital, he did give investors a clue as to where the bank most likely wouldn’t be looking: M&A. Though Babb did not definitively rule out a transaction, he said that organic growth is Comerica’s priority for now.

“We feel very comfortable with our footprint today and especially in the states where we are doing business and the growth potential there,” he said. “Adding internally to grow that is top of the chart at the moment where our focus is for expansion.”

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