The U.S. banking industry embraced stock buybacks with enormous vigor in 1994 and experts are predicting a further avalanche of repurchases in 1995.

Last year alone, the top 50 U.S. banking companies retired 124.2 million shares at a cost of $5.6 billion, according to Keefe, Bruyette & Woods Inc. And numerous banks have announced buyback programs this year.

"These are not one-time events," said Robert Albertson, a banking analyst with Goldman, Sachs & Co. "There is a very large pool of excess capital in the banking industry, and it has to be dealt with."

Keefe has not calculated the 1993 total but said last year's was almost certainly vastly larger.

Cleveland-based National City Corp. last year spent an amount equaling 76% of its net income to retire 12.4 million shares.

"If you can't justify the use of all the capital on hand, the logical thing is to return some of it to shareholders, " said National City's treasurer, Thomas Richlovsky.

The trend seems surprising, given that banks were under severe pressure to build capital just a few years ago. Besieged with loan defaults and pressured by the government, banks slashed dividends, shrank balance sheets, and issued stock.

Now, banks are exhibiting strong credit quality and earnings. And they have fortified balance sheets with hefty equity capital and loan-loss reserves.

Growth remains somewhat soft, however. And shifts towards securitization and fee businesses are reducing capital needs. So bankers are shedding idle equity.

"We had abundant capital. But the acquisition market was not particularly attractive, and loan growth was not robust," said James Armstrong, head of investor relations at SunTrust Banks Inc., Atlanta.

Mr. Richlovsky said the general logic on stock repurchases is as follows:

A company posting a roughly 17% return on equity and paying out 40% of earnings in dividends builds equity at a roughly 10% annual rate. If the bank is healthy and only needs a 7% capital expansion to support growth, however, it might shed the unneeded 3%.

Though such a bank could boost its dividend sharply, Mr. Richlovsky said share repurchases are more flexible. Instead of promising investors an extraordinarily high fixed payout, National City can roll with market conditions.

"Diamonds are forever and so are dividends," Mr. Richlovsky said. "But in the real world things fluctuate."

Major banks announcing repurchase programs so far this year include Banc One Corp., Columbus, Ohio; BankAmerica Corp., San Francisco; Chemical Banking Corp., New York; First Bank System Inc., Minneapolis; and PNC Bank Corp., Pittsburgh.

Analysts say they hope the list doesn't stop there.

Dean Witter Reynolds Inc. analyst Anthony Davis said he expected Pittsburgh's Mellon Bank Corp., which has an 11.1% equity-to-assets ratio following the takeover of Dreyfus Corp., to launch a major share repurchase next year.

Other candidates cited by Mr. Davis include Wachovia Corp., Winston- Salem, which has an 8.4% equity ratio; Kansas City-based Commerce Bancshares, 9.1%; Bank South Corp., Atlanta, 8.7%; Hibernia Corp., New Orleans, 8.9%; and Mercantile Bankshares Corp., Baltimore, which has an 12.4% equity-to-assets ratio.

There are a number of serious issues attending share buybacks.

For one thing, aggressive repurchasers can impede their ability to make stock-swap acquisitions. Under Financial Accounting Standards Board rules, stock swaps must be booked as cash deals if either participant recently repurchased a significant portion of shares.

The FASB rules already are a factor in the merger outlook for First Interstate Bancorp, Los Angeles, which last year spent a whopping $711.7 million to retire 8.3 million shares.

William S. Randall, First Interstate's chief operating officer, indicated the company would have to reissue shares in the hypothetical event of a major stock-swap transaction.

The catch in such exercises: Investors must be convinced that each newly issued share will have the same earnings power as each outstanding share. Absent such support, reissuances would depress trading values, hurting the chances of pulling off deals.

"What we are saying is that (potential major deals) would have to be supported by the market," said Mr. Randall.

Share buyback support also is needed from creditors, who want assurances that banks aren't weakening bond covenants.

"Repurchases are the top concern of bondholders right now," said Ethan Heisler, a credit analyst at Salomon Brothers Inc.

Though conceding that many banks have room to reduce capital, Mr. Heisler said bondholders worry banks will ratchet down equity too far - and wind up vulnerable when credit-quality problems erupt in the next recession.

Tanya Azarchs, a senior analyst at Standard & Poor's Ratings Group, said that, with the recent exception of PNC, repurchase announcements had not hurt bank credit ratings. However, the analyst said a few companies, including BankAmerica, were dampening prospects for ratings upgrades by increasing financial leverage.

Ms. Azarchs notes that total banking industry loans and leases grew by $184 billion, or 8.8%, during the 12 months ended Sept. 30. Mix in eroding pricing and underwriting standards, she says, and you can make a case for high capital ratios.

Bankers such as Mr. Randall say repurchases are indicative of managerial confidence, however. The vast repurchase program at First Interstate, he said, "says a lot about the low-risk profile of the balance sheet."

Felice Gelman, a buy-side analyst at Keefe Managers Inc., said massive capital could actually boost the riskiness of a bank as managers take more chances to support an outsized equity base. That scenario contributed to the New England savings bank crisis.

"Overcapitalized banks are performing a public service when they repurchase shares," said Ms. Gelman.

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