As banks mull buybacks, the fate of Basel III looms large (2024)

As banks mull buybacks, the fate of Basel III looms large (1)

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Large and regional U.S. banks are taking a mixed-bag approach to share repurchases and dividend payments amid uncertainty about proposed new capital rules, which could limit their ability to return money to shareholders but also seem likely to be softened.

Some of the banks, including JPMorgan Chase and Citigroup, plan to buy back stock at moderate levels this year. Some say they expect to repurchase shares, but they have not yet committed to a specific number. Others are planning to stay on the sidelines, at least for now, as the industry awaits clarity on the so-called Basel III endgame capital reforms, which have sparked one of the most intense battles in years between banks and their regulators.

And while most banks haven't changed their dividends strategy, New York Community Bancorp said Wednesday that it will cut its common share dividend from 17 cents to five cents, a move executives say is designed to help the Long Island-based company boost its capital levels and meet regulatory requirements as a larger bank.

Huntington Bancshares in Columbus, Ohio, is one of the banks choosing to defer buybacks as it seeks to increase its capital levels. The $188-billion asset company aims to boost its adjusted common equity Tier 1 ratio to somewhere between 9% and 10%, up from 8.6% in the fourth quarter.

"We are building capital as if the proposed regulations go forward," Chairman and CEO Steve Steinour said in an interview. "We believe that we should be in a strong position and the consequence of that is … we'll defer buybacks until we achieve performance at those levels."

For many banks, the past four years have resulted in a stop-and-go-and-stop-again approach to share buybacks. In the early days of the pandemic, when the economic impact of the health crisis was uncertain, banks put a hard stop to their buyback programs. Some of them also cut their dividend payments in favor of reserving capital for potential losses.

As concerns about the impact of the pandemic on the financial system eased, the Federal Reserve lifted a moratorium on buybacks, leading some banks that were flush with excess capital to quickly repurchase stock.

Though most banks kept paying dividends in 2022, they pulled back once again on buybacks — a result of higher capital requirements, sharply rising interest rates and more economic uncertainty.

Then, a year ago, several banks said they would revisit their share buyback programs and step up shareholder payouts, citing a buildup of capital and a slowdown of interest rate hikes.

The arrival of the Basel III endgame rules, which were proposed in July, put a damper on some of those programs. The framework would impose higher capital requirements on U.S. banks with at least $100 billion of assets. The phase-in period would be three years, starting on July 1, 2025.

Bank regulators had warned for months that they intended to raise capital requirements after Silicon Valley Bank, Signature Bank and First Republic Bank all failed in the spring of 2023.

Banking groups and other trade organizations have lobbied hard against the proposed reforms, arguing that the new rules could diminish lending capabilities and push up borrowing costs. Earlier this month, several financial trade groups, including the Bank Policy Institute, the Financial Services Forum and the Securities Industry and Financial Markets Association urged regulators to "repropose the rule," arguing that the current version violates federal law.

Some regulators are calling banks' buyback and dividend plans into question in light of the proposed reforms and banks' claims that the rules will affect lending. In a recent interview with the Financial Times, Acting Comptroller of the Currency Michael Hsu encouraged banks to "provide an analysis on what [banks'] share buybacks and dividend policies are going to be" under the Basel III framework.

"I'm hopeful that folks have included that analysis because if banks are saying it's really hurting the real economy, but they're providing increases in their share buybacks, I would suggest that there's some questions for the bank about what the priorities are," Hsu said.

Regulators are currently sifting through hundreds of public comments about the proposal's potential economic impact. The final rules are expected to be released sometime later this year.

Uncertainty over Basel III hasn't caused many banks to shrink or halt their dividend payments.

But given the lack of clarity about how much capital they will be required to retain, Truist Financial, M&T Bank and KeyCorp aren't ready to resume share buybacks.

Charlotte, North Carolina-based Truist, which reported a common equity tier one ratio of 10.1% earlier this month, remains "committed to building capital" for the time being, Chairman and CEO Bill Rogers said during the company's fourth-quarter earnings call.

"I think the best thing for us right now is to be in an organic capital-building mode," Rogers told analysts. "We haven't set a specific target, but I think 10%-plus for the short term to medium term seems like a good place for us to be landing right now."

M&T in Buffalo, New York, halted buybacks in mid-2023. When the $208.8 billion-asset company resumes repurchasing shares will depend on the results of internal and supervisory stress tests, continued economic stability and additional clarity on the Basel III rules, executives have said.

During M&T's fourth-quarter earnings call, Chief Financial Officer Daryl Bible said he would "love to be buying shares back, especially at the level that [M&T] is trading at right now." Shares in M&T fell nearly 15% on Jan. 18, the day the bank reported its latest earnings.

"I promise you we will do share repurchases" again, Bible said. "I can't tell you when that's going to happen, but is it core to our strategy, and we will definitely do that when we think it's appropriate."

At Cleveland-based KeyCorp, executives "do not expect to be buying back stock in the near term," CEO Chris Gorman told analysts during the bank's fourth quarter earnings call.

Regulation and compliance

Walls are closing in on the Basel capital reforms

In official comments on bank regulators' Basel III endgame capital proposal, concerns are being raised by a wide array of stakeholders — including civil rights advocates and consumer advocacy groups — suggesting major amendments or re-proposal may be necessary for the rule to cross the finish line.

On the other end of the spectrum, executives at First Citizens BancShares in Raleigh, North Carolina, said recently that they intend to buy back shares in the second half of this year, pending regulatory approval. But they did not say how much stock they will buy back.

Comerica in Dallas hasn't crossed the $100 billion-asset threshold, but it is still preparing to comply with the Basel III endgame rules. The $84 billion-asset company, which paused buybacks several quarters ago, will remain "cautious" in 2024 and won't be active in repurchases in the first half of the year, James Herzog, chief financial officer, said this month during Comerica's latest earnings call.

JPMorgan, the largest U.S. bank by assets, was in the buyback game last year, and probably will be again early this year.

In the fourth quarter, the New York-based company repurchased about $2 billion shares of its common stock. JPMorgan will probably do so again at about the same level in coming quarters, though it has "a lot of flexibility to adjust," Chief Financial Officer Jeremy Barnum said during the bank's most recent earnings call.

"For now, we plan to remain on a modest pace of buybacks … in light of the need to continue building to have a bit of a buffer" as the capital rules get finalized, he told analysts.

Citigroup's chief financial officer, Mark Mason, made similar comments in January about repurchases.

Citi returned $6 billion of capital to shareholders in the fourth quarter by way of common dividends and share repurchases, executives noted during an earnings call.

"We have committed to returning capital to our shareholders and, in fact, expect to do a modest level of buyback in the first quarter of 2024," Mason said.

But "the Basel III proposal is still out there and under discussion," he acknowledged. "We want to buy back as much as we can in shares, and we try to be disciplined about that over the past couple of quarters … but we have to be thoughtful about what those headwinds might look like."

Some analysts, including Betsy Graseck of Morgan Stanley, are assuming that more banks will buy back shares this year. The lack of firm rules under Basel III could be enough to jumpstart a large increase in share repurchases, particularly among larger banks that have the highest excess capital levels in history at time when loan growth is muted, Graseck wrote in a recent note to clients.

One noticeable outlier among the big banks: the trust bank State Street. This month, the Boston-based company announced a new $5 billion common share buyback plan, which has no expiration date.

During State Street's fourth-quarter earnings call, analyst Mike Mayo of Wells Fargo Securities wanted to know if the buyback plan indicates that State Street thinks the Basel III proposal will be modified.

The capital rules are "very uncertain," said State Street CEO Ronald O'Hanley.

"I don't know that we would have changed the authorization if we had perfect clarity" on the capital rules, he said. "It was a factor, but it's not like, 'We absolutely think it's going to be this.'"

Catherine Leffert contributed to this article.

As an expert and enthusiast, I don't have personal experiences or opinions, but I can provide you with information on the concepts mentioned in this article.

Share Repurchases and Dividend Payments by U.S. Banks

The article discusses how large and regional U.S. banks are approaching share repurchases and dividend payments in light of proposed new capital rules and the Basel III endgame capital reforms. The banks are uncertain about the impact of these rules, which could limit their ability to return money to shareholders. Here are some key points related to the concepts mentioned:

  1. Share Repurchases: Share repurchases, also known as stock buybacks, involve a company buying back its own shares from the market. This reduces the number of outstanding shares and can increase the value of remaining shares. Some banks, such as JPMorgan Chase and Citigroup, plan to buy back stock at moderate levels this year. Others are planning to stay on the sidelines until there is more clarity on the Basel III endgame capital reforms [[1]].

  2. Dividend Payments: Dividends are payments made by a company to its shareholders as a distribution of profits. While most banks haven't changed their dividend strategy, New York Community Bancorp announced a reduction in its common share dividend from 17 cents to five cents. This move is aimed at boosting the company's capital levels and meeting regulatory requirements as a larger bank [[1]].

  3. Basel III Endgame Capital Reforms: The Basel III endgame capital reforms refer to proposed regulations that would impose higher capital requirements on U.S. banks with at least $100 billion in assets. The phase-in period for these reforms is expected to start on July 1, 2025. The proposed reforms have sparked intense battles between banks and regulators, with concerns raised about the potential impact on lending capabilities and borrowing costs [[1]].

  4. Banking Industry Response: Banks have taken different approaches in response to the proposed reforms. Some banks, like Huntington Bancshares, are deferring buybacks and focusing on increasing their capital levels to be in a strong position. Others, such as Truist Financial, M&T Bank, and KeyCorp, are cautious and not ready to resume share buybacks until there is more clarity on the capital requirements [[1]].

  5. Regulatory Scrutiny: Regulators are closely monitoring banks' buyback and dividend plans in light of the proposed reforms. Acting Comptroller of the Currency Michael Hsu has encouraged banks to provide an analysis of their share buybacks and dividend policies under the Basel III framework. Regulators are currently reviewing public comments on the proposal's potential economic impact, and the final rules are expected to be released later this year [[1]].

  6. Market Speculation: Some analysts, such as Betsy Graseck of Morgan Stanley, speculate that more banks will engage in share repurchases this year due to the lack of firm rules under Basel III. The uncertainty surrounding the capital rules could prompt larger banks with excess capital levels to increase share repurchases [[1]].

It's important to note that the information provided above is based on the article you shared, and additional research may be required for a comprehensive understanding of the topic.

As banks mull buybacks, the fate of Basel III looms large (2024)


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