Big four banks to announce $15bn in share buybacks over next year

The four major banks are likely to announce $15 billion in share buybacks over the next year.

Analyst Richard Wiles said in a note that the big four were sitting on $19.5 billion to $28 billion of surplus capital. Picture: NCA NewsWire/Nikki Short

The four major banks are likely to announce $15 billion in share buybacks over the next year, with Commonwealth Bank to kick off the bonanza with a $5 billion deal at this year’s annual result, according to Morgan Stanley.

Analyst Richard Wiles said in a note that the big four were sitting on $19.5 billion to $28 billion of surplus capital, based on a target common equity tier one ratio of 10.75 per cent to 11.25 per cent.

Assuming an even more conservative target of 11.5 per cent, the excess would be more than $15 billion.

“We expect the banks to take a conservative approach to capital management in the near term given that COVID-related risks remain and the Australian Prudential Regulation Authority’s revisions to the capital framework are not yet finalised,” Mr Wiles said.

Despite this, CBA was likely to unveil a $5 billion buyback at the 2021 annual results, with ANZ, National Australia Bank and Westpac likely to follow up with buybacks of $2.5 billion, $4 billion and $3.5 billion respectively at their 2022 interim results.

The banks were expected to consider returning capital through off-market buybacks, as this allowed the distribution of surplus franking credits and could result in a slightly larger reduction in the number of shares for the same amount of capital.

The buybacks would reduce the banks’ shares on issue by 3 per cent to 5 per cent.

Mr Wiles said his analysis of recent off-market buybacks by ASX100 companies showed that they were normally done at a 14 per cent discount to the market price.

Fully franked dividends accounted for 39 to 99 per cent of recent off-market buybacks.

“This is determined on a case-by-case basis and can be influenced by the level of excess franking credits,” the note said.

“With this in mind, we estimate that the majors had about $7.5 billion of franking credits post the (recent) first-half dividends, with the lowest at ANZ ($350 million) and the highest at Westpac ($3.6 billion).

“Assuming that boards want to maintain a franking credit buffer to support one ordinary dividend, we think the dividend component could be up to 100 per cent at Westpac, 40 per cent at CBA and 25 per cent at NAB.

“However, the case for an off-market buyback at ANZ does not look as strong given its low level of franking credits.”

APRA updated its capital management guidance to banks and insurers last December, replacing its recommendation from July that entities should retain at least half of their earnings.

The regulator said that, since July, there had been an improvement in the economic outlook, bank capital and provisioning levels had strengthened, and most loans previously granted repayment deferrals had restarted repayments. However, much uncertainty remained in the operating environment.

Banks were expected to remain vigilant, regularly assess resilience through stress testing, and undertake a “rigorous” approach to recovery planning.

The onus remained on boards to moderate dividend payout ­ratios to ensure that they were sustainable, taking into account the outlook for profitability, capital and the broader environment.

APRA chairman Wayne Byres said a decade-long process of increasing capital levels and improving resilience in the banking system had put the nation’s banks in their current position of strength, allowing the sector to support customers and the broader economy at a time of crisis.

“The results of APRA’s extensive bank stress testing provide reassurance that the banking system remains well-positioned to absorb the impact of a severe economic shock and retain the capacity to continue supplying credit into the economy,” Mr Byres said.