ANZ kickstarts the banking sector’s wave of capital returns to investors

Some analysts were surprised the bank hadn’t opted for a larger buyback.

Some analysts were surprised ANZ didn’t undertake a bigger buyback. Hollie Adams/The Australian

ANZ’s move to kickstart the banking sector’s wave of capital returns to investors surprised the market not only in its timing, with the announcement coming amid lockdowns in Sydney and Melbourne, but also in its size, with analysts now eyeing a follow-up to the $1.5bn share buyback.

ANZ late on Monday announced that it plans to buy back the shares on-market as part of its capital management plan, with the purchases likely to begin in August. Based on its current share price, the buyback is estimated to reduce shares on issue by around 2 per cent.

An on-market buyback was the “most prudent, fairest and flexible method to return capital in the current environment,” the bank said.

Analysts and the broader market had been expecting CBA to move first, and perhaps for lenders to hold off on announcing their capital management plans while Sydney and Melbourne were in lockdown.

“ANZ has unexpectedly beaten CBA to the punch tonight, by announcing a $1.5bn onmarket share buyback,” Citi analysts told clients.

“We are surprised at the timing of the buyback announcement given continuing Covid uncertainty, regulatory relief, and expected rise in deferred loan balances,” they said.

ANZ, with a CET 1 capital position of 12.4 per cent, looked through the uncertainty in a boost for investors.

But some analysts were surprised the bank hadn’t opted for a larger buyback.

“Before today, our forecasts assumed that ANZ would commence a $2.5bn buyback in the second half of 2022 a further $1bn in fiscal 2023,” Morgan Stanley analysts led by Richard Wiles said.

“We now model this $1.5bn buyback and then another $2bn on-market buyback starting in the first half of 2023, but see risk to the upside if ANZ targets around an 11 per cent CET1 ratio.”

Unlike its major bank peers, an off-market buyback or a special dividend was not “a plausible option” for ANZ, given its relatively low balance of franking credits, the Morgan Stanley analysts said, as they pointed to the two buybacks the bank announced in the 2018 financial year.

Goldman Sachs analysts took a similar view, estimating $3bn of buybacks from ANZ over the course of 2022.

“With APRA having signed off on this buyback, we think the ANZ announcement highlights the regulator’s comfort around the financial strength of ANZ — and the sector more broadly — despite the recent Covid-19 outbreak,” they said.

ANZ’s move also has analysts wondering who will be next to announce a capital return to investors.

“ANZ‘s announcement should make investors more confident in the major banks’ capacity to start buybacks, although a more prudent approach may be warranted in relation to larger, off-market buybacks,” Morgan Stanley said.

Citi expects CBA to be next, with a $5bn off-market buyback announcement at its fiscal 2021 results in August, followed by Westpac and NAB.

Goldman Sachs, meanwhile, sees the nation’s largest lender coming out with a special dividend.

“We forecast CBA to announce a $3.5bn special dividend at its FY21 results on August 11,” Goldman Sachs analysts told clients.