I have talked about how buyback can drive Citi’s share price. All the banks (big, medium) banks are preparing for Basel III endgame. The expectation of a high reserve requirement, and what are considered risky assets, how much capital are required are slowly emerging. The big money center banks have already started adjusting their risky assets exposure to reduce capital requirements. It is anticipated the final regulatory requirement may be lot less than once feared. The below table shows how much excess capital banks are holding vs their regulatory requirement and vs market cap.
When the Basel III Endgame is announced, and stress test are completed, we will know how much buyback capacity each bank will have, and a significant bank buyback may kick in. Lot of these shares have moved up sharply from last year, but buyback is such strong momentum, they can drive another 10% to 20% easily. especially some of the regionals with 20% excess reserve as % of their market cap.
Now that the stress test is completed, which gives clarity to the capital situation and what is available for the banks to pay dividend and do buybacks, here is an estimate from Wells Fargo research. This table shows how much capital is available to the banks, if they choose to do buybacks. Still many regional banks may chose to preserve capital for M&A, recession, growing business, etc.
Many regional banks are looking good. I haven’t looked at it, I might buy some bank preferred’s that yield above 6.5%. Currently all my fixed income are in treasury bills.
The big banks were all preparing for Basel III end game capital requirements. Looks like this is not going to be as onerous as some feared. In fact, Bloomberg reports are suggesting it will be in the range of 9%. Of course, there will be period of comments, extension and before regulators finalizing it, there is a possibility of new congress sworn in. If it is a GOP sweep, we are back to square one.
Assuming the 9% rule passes, that should release more capital for further buyback or loans.
JPM, BAC, WFC and Citi together has returned $80 B in 2024, of this buybacks are $55B. This is just the 4 banks, of this, Citi only did $3 B.
The amount of excess capital banks are carrying is staggering. With Basel III getting clearer, and with the new administration, the regulations are not going to onerous, 2025 also will be an year of buyback, especially at the big regionals. I am not sure banks M&A is going to pick up. The loan book is not growing much. Banks are carrying all these cash and have no choice but to return them, at least some of them.
Even JPM, whose CEO Dimon said his stock price is high, still did $18.5 B in buybacks on 2024 and are sitting with close to $40 B in excess capital. And they will be adding another $35 to that pile next year. They have no choice but to return capital or buyback shares!!!
Yes, banks have no choice but to do buyback. If markets get rocky on 2025, keep this in mind. Banks/ financials may present opportunities to buy.
USB is leveraged to lower interest rate, and so far they have not done buybacks, and they are in the process of digesting an M&A, They could start buyback.
TFC, leveraged to loan growth, they can buyback 300 million shares and fund 10% loan growth, so much capacity they have;
Everyone knows how much I love ‘Citi’, & my thesis on WFC
The buybacks are only going to get even bigger!!! Federal reserve issued new stress test scenarios, that are less onerous than the past.
How good is this for banks? MTB, which is a CAT IV bank, are subject to stress test alternate year, decided to opt-in for the test this year!!! So that they can reduce their capital level!!! A bank is voluntarily opting-in!!!
