The oncoming bank buyback

Investment Analysis Clubs Liquid Lounge
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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.

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I have not yet fully thought through how to position myself for this. I may need to research further and narrow down 1 or 2 names and will post.

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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.

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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.

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