Bank share repurchase programs are beginning to lose their allure for some Wall Street observers.
An increasing number of bond and equity analysts are raising questions about the programs in which banks distribute excess capital to shareholders by buying their stock rather than using it for loans or investments in their business.
These skeptics are concerned that the programs have gone too far, too fast. They argue that excessive use of the strategy could eventually thin capital ratios, disrupt earnings, and cause overleverage in some banks.
"Big banks have become cash-throw-off businesses," said Richard X. Bove, bank analyst at Raymond James & Associates, St. Petersburg, Fla. "If you repurchase stock you are shrinking your capital and limiting your ability to leverage your balance sheet."
The argument for bank repurchase programs is a strong one. By adopting the strategy, advocates say, banks are taking a disciplined approach, controlling their capital through a program that helps boost the stock price and earnings per share without adding to risk.
Former Vanguard portfolio manager John Neff, who soared to fame by investing in bank stocks, remarked recently that it is better for a bank to repurchase its stock at 12-times book value than to make imprudent loans.
Bankers clearly agree. According to Keefe, Bruyette & Woods Inc., the aggregate of stock repurchases by the 25 largest banking companies leapt to $5.8 billion in the fourth quarter of 1996, from $2 billion in the first quarter of 1995. And Keefe projected $7 billion of bank share repurchases during the current quarter.
But "there is a heightened sensitivity that repurchase plans without restraints are not helping the banking industry," said Arthur Loomis, president of Northeast Capital and Advisory Inc.
Mr. Loomis suggested some banks are repurchasing shares because their peers are doing it, not because it is right for their business strategies. "Bankers are much like institutional lemmings," he said, "and that is a future concern."
Bank analyst David S. Berry of Keefe Bruyette is generally supportive of bank buyback programs but said they "can be taken too far."
Mr. Berry noted that bank balance sheets are not as strong as they were two years ago and that a more aggressive capital management posture had led to declining capital ratios.
In general, Tier 1 capital ratios have bounced back recently, with the issuance of a new form of debt called trust-preferred securities. But it is just a matter of time before the ratios start slipping again, said bank analyst Tanya Azarchs of Standard & Poor's Corp.
Banks believe they are well-capitalized at 6.5%, Ms. Azarchs said. "But as some banks drift toward the 6.5%, those that have a riskier profile could start to look overleveraged to us," she warned.
Share repurchase programs can also make bank earnings more volatile, said Mr. Bove of Raymond James. Buying back stock "adds cyclicality to the earnings," he said.
Mr. Loomis of Northeast Capital added that stock buybacks also prevent banks from deploying capital into other business lines.
"Banks need to support nontraditional financial services, such as trust departments, brokerage entities, and insurance," he said. "That capital is necessary to develop those enterprises, and if they do not have it they will not participate" in gains, he said.
Mr. Loomis acknowledged that the ill effects of buyback programs wouldn't be seen for some time. Nevertheless he argued that the very concept of stock repurchases bodes ill for banking's future.
"Share repurchases are an indictment against the industry," said Mr. Loomis. "In effect they are saying we can't deploy the resources as well as the investor."