Merger activity is throwing cold water on the industry's most effective capital management tool.

Stock repurchase programs-also known as buyback programs-have significantly declined as merger activity has picked up, market experts say.

The 25 largest banks repurchased $2.9 billion of shares in the first quarter, off from $3.1 billion in the fourth quarter and $4.8 billion in the third quarter, according to a Keefe, Bruyette & Woods Inc. survey.

Bank stock repurchase programs peaked at $11.4 billion during the first quarter of 1997.

Buying back stock is one of the least risky ways for banks to deploy excess capital.

Because it reduces the number of shares outstanding, it lifts per-share earnings.

Buybacks have been an important factor in pushing banks' shares to record valuations.

However, as banks race to become bigger - and in their minds better - through mergers and acquisitions, the capital management strategy has become less popular.

Analysts acknowledged that the first-quarter decline of buyback programs is marginal, but said that the downward trend is likely to continue until early next year.

"The trend has been flat to down," said bank analyst Marni Pont O'Doherty of Keefe Bruyette.

"But I wouldn't be surprised if there are less buyback programs because of the flurry of merger and acquisition activity. I look at the math and I can't see how we can continue at this level."

Some of the biggest purchasers of their own stock-Citicorp, NationsBank Corp., BankAmerica Corp., and First Chicago NBD Corp.-have been participants in big mergers this year.

Securities rules limit share repurchases in pooling-of-interest mergers. Pooling-of-interest mergers occur when the seller is paid with shares instead of cash and the balance sheets of the companies are combined.

The acquirer's shares become "tainted" and may not be repurchased until six months after the deal closes.

In one recent transaction, National City Corp. rescinded its buyback program two weeks after it announced plans to purchase First of America Corp.

"Because of the number of poolings so far, some very heavy hitters are going to be out of the market," said Ms. O'Doherty. "And although other companies may come in, they are not going to make up for what we are going to lose."

Bank analyst Frank J. Barkocy of Josephthal & Co. pointed out that banks are more reluctant to buy back shares because of the loftiness of stock prices.

Repurchasing shares also reduces capital, added Mr. Barkocy."Banks need to keep their powder dry, meaning that they need to maintain sufficient capital in order to make acquisitions."

Mergers are much riskier than buying back shares. But analysts say a good acquisition is likely to benefit shareholders more than a buyback.

"Acquisitions always have some degree of risk, but they can add substantially to your earnings stream in the short, intermediate, and long- term," Mr. Barkocy said.

A decline in stock repurchase programs "is a temporary negative that will get corrected in time," said industry analyst Michael L. Mayo of Credit Suisse First Boston, who argues that such programs are likely to make a comeback after the bulk of mergers and acquisitions have been digested.

The market is unlikely to miss them in the meantime.

"When a buyback program is announced, people move," said Ms. O'Doherty.

"But when a merger is announced, it really gets people moving. The market likes deals and consolidation, and the loss of a buyback program is the price you pay for that."

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