The litany of criticism against the boom in share buybacks is unlikely to go away soon. You know what else is unlikely to go away soon? Share buybacks. Especially at banks.
The latest round of earnings and announcements of capital-return plans from banks highlight how repurchases are often the preferred way of deploying cash.
Despite the widespread criticism of the practice, JPMorgan Chase said it was increasing its planned buyback to $10.6 billion from the $6.4 billion announced last year. Citigroup is also planning a huge $8.6 billion buyback. Bank of America lifted its expected payout in the next year to about $8.1 billion, including a $5 billion buyback. Given the greenlight from regulators, many banks would likely repurchase even more, as was the case earlier this year.
For buyback skeptics, it could be easy to look at all of this as some sign of capitulation on the part of banks that have concluded they have no better ideas for deploying capital in the real economy. As Ernst & Young described it recently, investors "want to better understand why capital used for stock repurchases is not better off invested in human capital, innovation and other long-term strategies."
That may be a solid knock on some companies in some situations. But when it comes to banks, there's also an obvious motivation that is often ignored: They issued tons of shares to raise capital or buy competitors during the financial crisis, and buying them back now simply reflects continuing efforts to recover and normalize.
Take a look at how Bank of America's share count changed over the last decade, swelling amid the financial crisis as it sold stock to raise cash and issued shares to buy Merrill Lynch and Countrywide Financial. The count has barely budged from the post-crisis highs:
While some banks, like JPMorgan ...
... and Goldman Sachs are further along in reducing share counts that swelled during the crisis.
With the share count influencing all manner of ratios of earnings and book value and anything else with a "per share" element to it, it's highly unlikely that bank executives and boards will stop viewing buybacks as the best way to help perk up depressed valuations, especially as growth in net-interest and capital-markets income remains elusive.
So don't expect many banks to succumb to the critics and put the brakes on share buybacks just yet. Maybe that won't even happen until the next crisis hits and it's time to sell shares again.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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