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What increase in buybacks says about bankers' outlook

More banks are setting the stage for stock repurchases as they brace for an economic slowdown.

The number of repurchase programs authorized in 2019 by publicly traded banks rose by 65% from a year earlier, to 253, according to data compiled by Capital Performance Group. While authorizations do not guarantee repurchase activity, a large number of executives have signaled an interest in buybacks in 2020.

Buybacks also help banks manage earnings per share, by reducing shares outstanding, and capital levels. They can also indicate management’s support for a company at a time when shares are declining.

“We believe there’s still a compelling opportunity for banks to actively repurchase stock and support their shares,” said Christopher McGratty, an analyst at Keefe, Bruyette & Woods.

KBW’s research team noted in a recent report that investors were largely supportive of the 176 bank buybacks they tracked between October 2018 and December 2019. Shares for more than 70% of those banks outpaced their respective index on the day they announced their buybacks; two-thirds continue to outperform.

Some banks have been picking up the pace of their repurchase activity, including Dime Community Bancshares in Brooklyn, N.Y., and Howard Bancorp in Baltimore.

Dime Community Bancshares in Brooklyn, N.Y., ramped up its activity in the fourth quarter, buying more than 750,000 shares for $15 million. The move took about 2% of its stock off the market, Avinash Reddy, Dime’s chief financial officer, said during the company’s quarterly earnings call.

The $6.4 billion-asset Dime recently authorized a new plan that allows it to repurchase another 7.5% of its outstanding shares.

“We don't have to grow the balance sheet in order to grow our core earnings power per share,” Reddy said.

Howard bought back nearly 50,000 shares during the first two weeks of January, often buying the maximum daily amount permitted by the Securities and Exchange Commission, CFO George Coffman said during the $2.4 billion-asset company’s quarterly call.

By mid-January, Howard had spent about a fifth of the $7 million it is authorized to spend on buybacks, putting it on pace to “hit the max” by midyear, Coffman said.

To be sure, many banks would rather deploy capital to foster growth, either by making new loans or pursuing acquisitions. But the right deal can take years to develop. Also, commercial loan demand is waning and concerns over credit quality are slowly increasing.

“Our primary desire is to use capital to grow the balance sheet to support above-market loan growth,” including hiring and acquisitions, John Ciulla, president and CEO of Webster Financial in Waterbury, Conn., said during the $30.4 billion-asset company’s earnings call.

Absent such opportunity, “I think what you'll see is us being more likely to buy back shares over the next couple quarters,” Ciulla added.

There are banks that are inclined to hoard capital in preparation for more challenging days.

While it bought back 500,000 shares in the fourth quarter, Home BancShares in Conway, Ark., is more interested in holding onto capital in 2020, said Johnny Allison, the $15 billion-asset company’s chairman, president and CEO.

Home, which set aside $30 million in capital in 2019, plans to tuck away another $60 million in 2020, or roughly $5 million a month.

“The capital is being built for one of three reasons: maybe a downturn, used in a transaction or to reduce debt,” Allison said during his company’s quarterly call.

Investors are watching how banks deploy capital, said Brad Milsaps, an analyst at Piper Sandler. He said banks are wise to brace for challenging times, given the protracted economic cycle, relatively high levels of corporate leverage and hints of credit deterioration in certain sectors.

“Maintaining that conservative view of risk is smart,” Milsaps said.

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