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Big 4 US banks driving lion's share of industry buybacks

The Big Four U.S. banks have fueled a stock buyback frenzy in recent years, despite facing the tightest regulatory capital constraints in the industry. Regulators and lawmakers are now considering loosening some of these capital controls, which could lead to even more share repurchases.

An S&P Global Market Intelligence analysis shows that in 2017, JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. bought back a total of $52.67 billion in shares, making up 68% of the $77.47 billion that the U.S. banking industry repurchased in aggregate.

This group has been repurchasing shares at a faster rate than the broader banking industry for years. In 2016, these four bought back 62% of the $51.37 billion in shares that the banking industry repurchased in aggregate. In 2015, the Big Four repurchased 53% of the banking industry's $41.52 billion in aggregate buybacks.

Howard Silverblatt, senior index analyst for S&P Dow Jones Indices, says the financial industry bought back more stock than any other sector in 2017. His analysis of buybacks shows that JPMorgan, Citi and BofA bought back more stock in 2017 than any publicly traded company other than Apple Inc.

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As the pace of big-bank buybacks has increased over the past three years, the Federal Reserve has been softening its tone in the Comprehensive Capital Analysis and Review process. This annual exercise requires that big banks earn a clean bill of health on their stress tests in order to follow through on planned capital distributions.

Regulators have signaled that they may finally be comfortable with capital levels and in June 2017 approved the plans of all 34 participants in its seventh annual CCAR exam.

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On April 10, the Fed took the first steps in simplifying capital requirements for the largest banks by proposing a "stress capital buffer" that would technically require higher common equity tier 1 ratios for some firms but tweak the stress test itself to reduce the level of required prefunded capital. The largest banks have long complained that the stress tests serve as "binding constraints" because they often include higher capital requirements than other rules, like Basel III. The stress capital buffer proposal would no longer assume that a firm would make all planned capital distributions over the planning horizon, and instead would only require firms to prefund four quarters of planned common stock dividends.

The Fed estimates that the changes would reduce CET1 capital requirements on the largest banks by about $35 billion.

Another proposal, launched by the Fed on April 11, similarly blames the enhanced supplementary leverage ratio as a binding constraint and suggests tailoring minimum tier 1 capital requirements to the systemic risk level of each individual institution. The Fed estimates that the change would reduce the amount of tier 1 capital held at the largest banks by about $400 million.

On Capitol Hill, a legislative package to roll back large swaths of the Dodd-Frank postcrisis regulatory framework proposes giving the Fed the power to further loosen minimum capital standards on JPMorgan and Citi by allowing both companies to exclude custody funds parked at the central bank from the leverage ratio's denominator.

The large banks have spoken publicly about their capacity to distribute capital going forward. Citi informed analysts early in the year that the company should be well-positioned to increase stock repurchases while Bank of America noted that with a high tangible book value, the company expects to reward shareholders with a "substantial amount" of stock buybacks.

Early in 2018, Nomura Instinet analyst Steven Chubak wrote that changes to binding capital constraints should lead to additional buybacks and support a 6% upside potential to 2019 earnings per share.

Tax Reform

The recent federal tax overhaul, which slashed the corporate tax rate to 21% from 35%, is expected to boost buybacks for all industries. In the spring, the National Association for Business Economics surveyed economists about where they expected to see the biggest positive impact from tax reform. The largest share of respondents, 31%, predicted that the changes would lead to increases in dividends to shareholders, share buybacks and retained earnings.

Banks in particular stand to benefit from the change, as the industry is known to pay among the highest corporate tax rates. Banks are still sorting through strategies to deploy the excess capital but some firms have already pledged to funnel the benefits from lowered taxes into rewards for shareholders.

William Lazonick, a University of Massachusetts Lowell professor who studies buybacks, said in an interview that the postelection surge in the equity markets is also helping to fuel repurchases because higher stock prices mean more competitive pressures to inflate earnings per share.

"Buybacks will keep going until there's a crash," Lazonick said, adding that public companies could break records for repurchases in 2018.

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