Are bank buybacks a sign of strength or weakness?
The rationale behind a bank buyback can be different in emerging versus developed markets.
The developed-market (DM) model of a typical bank share buyback is this: a buyback usually occurs when the stock price has been riding high and the bank has excess capital.
Management can’t think of what to buy that will spur growth, neither where to deploy capital for organic growth opportunities. So, the management committee agrees to pay a billion dollars or two – or six, as with Morgan Stanley in 2019 – to buy back bank shares, which nudges the share price up a percent or two, and which not coincidentally helps to trigger management performance payouts that are linked to – no surprises – share price targets.
With the success metrics triggered, new stock is issued in the form of options, which dilutes the stock for ordinary investors. Wash, rinse and repeat.
For example: on December 19, 2019, Goldman Sachs announced an increase in its regular share buyback programme to $2.16 billion – up from $1.25 billion in June 2019 – while the stock price was at its annual high. The share price rose, but barely, in the following sessions.
Bank buybacks tend to work differently in emerging markets (EM).
The sensitivity of a bank’s share price to a buyback is a reflection of the strategy being employed
Take BTG’s recent R$1 billion share buyback that took place on January 11. The bank’s stock had been pretty badly beaten up – it was down to R$19 from above R$32 in July 2021. Senior management see this as the result of being wrongly viewed as a growth stock by investors. The bank’s share price had fallen precipitously, alongside others placed in this category. So, CEO Roberto Sallouti announced a share buyback.
“It was an expression that we think the share price has dipped far too low – and that we can’t think of any investment that is a better return than our own stock,” says a senior partner at BTG Pactual.
And this statement to the market was heard. The buyback didn’t result in a percentage point or two increase: its stock bounced and was trading up 22% at the end of January.
Ultimately, the sensitivity of a bank’s share price to a buyback is a reflection of the strategy being employed: is it an EM-style display of strength in buying share-price weakness, or a typical DM display of weakness in buying share price strength?