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!!!
Truist has significantly ramped up capital returns in 2025. In 1Q25, the company repurchased $500M in shares, followed by another $500M between April 1 and April 17. Management also guided an additional $250M in buybacks for the remainder of 2Q25, bringing total planned repurchases to $1.25B for the first half of the year.
In addition, Truist is maintaining its annual dividend of $2.08 per share, which equates to roughly $1.38B in payouts for 1H25. Truist appears set to return 100% or more of its earnings to shareholders through dividends and buybacks.
Separately, they are confident that they can do $3.85 EPS, and reduced IB, reduced NII but loan growth is picking up.
It is a good long-term buy at this price. Since I already have full position and very large position in banks, I am thinking of doing some covered call, Jan 26 $30 that should yield 14% ~ 15% annualized return including dividends.
Truist expects to do $500 M per quarter or 100% of earnings returned via dividends and buyback. But they opportunistically accelerated this quarter to take advantage of the price decline.
expected EPS $3.85, dividends $2.08, dividend yield 5.78%, Tangible Book value $31
First Citi announced $20 B buyback and now $WFC announced new $40B buyback program.
If the economic uncertainty persists, banks will instead of issuing loans will do buybacks. if the stock price declines in a selloff the banks will tactically increase the buyback to take advantage like $TFC.
JPM had an investor day yesterday, and they have $57 B in excess capital, and you add this to the net income they will generate over the next 3 years, they will have $200 B that they will have to deploy, that is 27% of their current market cap.
Here is a chart from Morgan Stanley showing the total payout as % of net income, in dividends and buyback. If you take the universe of stocks that have 80% payout ratio and select the banks that have about < 40% in dividends, these are the banks that can maintain dividends, if required they can slow down buybacks to support dividend, then look at their capital position and who has excess capital, they may not release that excess capital to buyback, but they can use them for growth and return 100% of their net income in dividend and buyback.
There are 17 banks in the 80% payout ratio. Within that you can choose a bank that meets your outlook for interest rates, loan growth, M&A, benefit from regulatory changes, etc. Please note, the banks that are outside of this universe are solid institutions. But for whatever reasons their payout ratio is less. I use the payout ratio as a proxy for management confidence. For ex, $PNC has good NII tailwinds, loan growth, etc, but their TPV is $100 and the stock is at $180, limiting the bank from buybacks and the dividend yield is just 3.5%.
Out of this universe I own $C, $WFC, $TFC and completely out of $BAC, $JPM.
The Fed board voted 5-2 on Wednesday to propose changes to what’s known as the enhanced supplementary leverage ratio, … The revisions would reduce holding companies’ capital requirement under the ratio to a range of 3.5% to 4.5% from the current 5%. Their banking subsidiaries would see that requirement lowered to the same range from 6%
This will release $200 ~ $225 B in capital for G-SIB. Here is the list of G-SIB
JPMorgan Chase
Citigroup
Bank of America
Bank of New York Mellon
Goldman Sachs
Morgan Stanley
State Street
Wells Fargo
The banks and financials are relentlessly moving up. Everytime I post I feel I don’t have sufficient allocations to this sector.
When Fed starts cutting interest rates (current expectation is 6 cuts in 2026), that will bring down AOCI significantly. AOCI is currently negative for many banks as their bond holding were at lower rates compared to current rates. As rates drop those book losses will decrease and in few cases turn positive. What this means is it will release more capital. Since many regionals already have excess capital, these releases flowing through income statement, will make more cash available for buyback.
Why I am emphasising so much on buyback is banks really have no other use for these excess capital but to return it to shareholders via buyback.
All 22 banks passed stress test and $WFC had the best performance of its capital requirement going down by 1.3%, C .5% and TFC .3%. I expect $WFC to return all the profits through dividends and buyback, Citi to return more than their net profits and $TFC slightly less, since they have used April decline to accelerate some buybacks during 2Q and they generally stick to their quarterly cadence.
The entire financials are a buy, since they will be returning so much capital via buyback. The steady buyback (of course services becoming bigger part of revenue) helped Apple to rerate from 15x to 30x multiples. While I am not expecting such a dramatic increase, but banks will trade much more closely to the historical multiples of earnings and book value.
The stress test has released an incremental $50 B cash, most of which will go towards buyback and expect almost all the banks to increase their dividends.
Excess capital as % of market cap; Note $KEY has not participated in this round stress test, so when they do next year, it would further release more capital. For those who don’t want to pick individual banks, just go with $KRE. The regional bank Index.
