Big banks’ earnings growth is almost entirely fueled by buybacks

Most of the earnings growth expected at megabanks this year hinges on one thing: stock buybacks.

That’s what happens with an industry that’s throwing off billions of dollars in profit and is well-capitalized compared to historical levels and yet faces limited growth opportunities, according to a recent note from KBW analysts led by Fred Cannon.

The impact is greatest at the biggest banks, which generate the most earnings and are held to the highest standards for capital. For instance, at banks like J.P. Morgan Chase, about 63 percent of the median expected earnings per share growth in 2019 is tied to share repurchases, according to the note.

Without repurchases, which reduce the total number of shares outstanding, EPS growth would be far below the already-modest 4.4 percent median forecast for that group, KBW said.

Smaller banks are more likely to use their capital for loan growth rather than stock repurchases. At large regional lenders, 34 percent of earnings growth this year will be thanks to buybacks. At smaller firms, 25 percent of earnings growth is linked to repurchases. Both are expected to increase their earnings faster than the megabanks.

Big banks’ reliance on share repurchases could be a hot-button topic ahead of the 2020 elections. Politicians from Sens. Chuck Schumer and Bernie Sanders to Marco Rubio support bills that restrict or tax corporate share repurchases. The knock on buybacks is that wealthy investors benefit most from them, and that corporations should be spending more on employees or pursuing investment and growth opportunities.

After the Trump administration slashed taxes on corporations, American companies spent a record $1.1 trillion on share repurchases last year.

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