Share repurchases are an important mechanism used by companies to return capital to shareholders. Holders have an opportunity to liquidate if they choose, and the buyback gives remaining shareholders a larger claim to the company's net equity and future earnings. In the aftermath of the 2008 financial crisis, many companies took advantage of low interest rates to repurchase shares, which were historically cheap around the 2009 market bottom. As the market rebounded, share repurchases remained popular, outgrowing dividends as the primary form of capital return and taking up a growing proportion of corporate operating profits. Buyback activity carried out by members of the financial sector generally followed this pattern, but the dynamics were slightly different because the financial sector was the epicenter of the 2008 crisis that triggered a recession and stock market crash.

Buybacks by Year

Historical share repurchase data in the financial sector indicates heavy buyback activity going into the 2008 recession, a steep decline in 2008 and 2009, and a steady climb through 2015. Over the decade leading up to 2015, 2007 experienced the heaviest share repurchases in the financial sector, totaling 93.2 billion. According to FactSet Research Systems Inc. (NYSE: FDS), the largest outlays for buybacks during that decade occurred in the fourth quarter of 2006, when $29.2 billion was returned to shareholders across the sector.

The first quarter of 2009 was the leanest, during which less than $1 billion was spent on repurchases. Only $6.7 billion was returned to shareholders through buybacks in 2009. The year 2010 marked a return to growth as outlays nearly tripled year over year (YOY). The second and third quarters of 2011 saw a significant spike, as financial firms took advantage of low prices as their own stability began to improve. The 2011 surge was led by JPMorgan Chase & Co. (NYSE: JPM), Goldman Sachs Group Inc. (NYSE: GS) and Bank of America Corporation (NYSE: BAC). During the period of recovery after the 2008 financial crisis, the third quarter of 2015 was the most active for repurchases with $25.5 billion in buybacks. This contributed to 2015 becoming the most active year for buybacks since 2007 at $90 billion.

Buybacks by Company

The level of repurchases made by each company is heavily influenced by the firm's scale and market capitalization, and the larger entities are predictably able to purchase a higher value of shares in absolute terms. Goldman Sachs led the sector with $45.6 billion in share repurchases over the 10-year period ending in 2015. The company's buybacks were largest before the recession, and it regained a relatively constant quarterly return of capital once the risks of the 2008 financial crisis began to fade.

Wells Fargo & Company (NYSE: WFC) followed Goldman Sachs at $40.6 billion, JPMorgan at $37.2 billion, Bank of America at $35.7 billion, American International Group Inc. (NYSE: AIG) at $30.6 billion, American Express Company (NYSE: AXP) at $28.5 billion and Travelers Companies Inc. (NYSE: TRV) at $28.3 billion. Almost all of these firms are among the 15 largest in the industry, though Goldman Sachs, AIG, American Express and Travelers were disproportionately active. Relative to money center banks and regional banks, insurance companies and investment banks seemed to be more active in buybacks.

Outlook

Share repurchase activity is dictated by stock prices, cost of capital and financial stability. Before the 2008 financial crisis, financial sector firms were engaging heavily in repurchase activity despite relatively high interest rates and soaring equity valuations. As conditions deteriorated in 2009, repurchase activity dropped steeply, especially in the financial sector, as balance sheets were threatened and future cash flows became increasingly uncertain. A stabilizing economy and low interest rates assuaged those fears by 2011, and companies across all sectors moved to take advantage of cheap stock prices to provide value to the shareholders who were looking to maintain holdings. The strong repurchase trend expanded from 2011 to 2015 despite rapid stock price appreciation driving up the cost of buybacks. Rising interest rates or excessively rich stock valuations might curb buyback volumes, and any contagion from defaults in the energy or mining industries could impact bank balance sheet strength, though these are unlikely to have a significant impact on the largest banks.

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