A strong end to 2020 has paved the way for major U.S. banks to buy back more than $ 10 billion worth of their shares in the first quarter, as pandemic year loan losses decline and capital markets run at full speed .
JPMorgan Chase is expected to lead the way with buybacks, spending about $ 3.2 billion on its own shares by the end of March, based on analyst forecasts compiled by the FT. The remaining $ 7.4 billion is divided between Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and Wells Fargo.
Analysts expect buybacks to approach the maximum allowed by a Federal Reserve decree in late December, which surprised investors by allowing banks to resume redemptions and return billions to shareholders while flattering bank earnings per share.
Banks voluntarily stopped Share buybacks last March, as the pandemic threatened a deep recession and catastrophic credit losses. The June Fed stress tests redemptions prohibited until the end of 2020 and cap dividends at a level linked to recent earnings and payouts.
First quarter redemptions will be capped so that the sum of dividends and redemptions cannot exceed the average quarterly profit of the previous year. “They may not all be peaking, but we expect them to come close,” said Jeff Harte, analyst at Piper Sandler, noting that banks’ capital levels were rising. more “stronger and stronger” in 2020.
Mike Mayo, an analyst at Wells Fargo, estimates that America’s largest banks, excluding Wells, could repurchase 15% of their shares over the next two years. “The big question (for the banks) is going to be to what extent are you going to be aggressive in terms of redemptions, over what period?” he added.
The European Central Bank ruled last month that the strongest banks in the euro area would be allowed to resume paying dividends from the start of this year, subject to tough conditions on profitability and capital ratios .
JPMorgan marked the Fed’s Dec. 18 announcement by stating that its board had authorized a $ 30 billion buyback program, over an indefinite period. Mr. Harte said it would be a multi-year process.
Morgan Stanley’s board authorized a $ 10 billion buyback program in December. Analysts believe the bank could make around $ 1.8 billion in the first quarter, based on their expected profits for the last three months of the year.
The other banks promised more details of their payment plans in their first quarter earnings announcements, which begin Thursday with Wells Fargo. The approach of this bank is very much in doubt. Analysts say they could make around $ 150 million, the lowest of the bunch, but the bank has warned it may not as it implements a massive restructuring program.
The six banks are expected to post fourth quarter net profit about 10% lower than 2019 level and about 5% lower year-over-year revenue, based on consensus forecasts compiled by Bloomberg. The highlights will be the continued boom in financial markets that fueled earnings in the second and third quarters, and better credit performance.
“I think we will get reserve releases,” said Charles Peabody, analyst at Portales Partners, referring to the accounting process where banks increase their profits by releasing credit loss charges taken in previous periods. He added that JPMorgan boss Jamie Dimon had previously said banks were too reserved if the credit cycle normalized.
The six banks recorded more than $ 65 billion in charges for future loan losses in the first nine months of the year. On December 9, Citi CFO Mark Mason told a conference that, given the improving economy, “you’re probably more likely to see rejections when I think of reserves than we see constructions “. Analysts expect fourth quarter provisioning charges to be around $ 6.5 billion across the group.
Brian Kleinhanzl, analyst at KBW, said that “the worst credit score is out of the question, but there is still uncertainty” about how the cycle will play out, while other analysts have said banks would be cautious about publications since the trajectory of the pandemic could change rapidly.
Trading and investment banks were a bright spot for banks for much of the year as the pandemic sparked a wave of debt issuances and transaction, with a surge in the volume of stocks and bonds changing hands.
“They’ve telegraphed well enough that it’s going to be a solid quarter in capital markets,” said David Konrad, analyst at DA Davidson. Mr Mayo of Wells Fargo said capital markets would be ‘stronger for longer’ as companies commit the offense with capital increases and deals, while trading revenues will not stay at 2020 levels , they would remain solid.