NAB follows ANZ with $2.5bn share buyback

NAB has shrugged off the impact of extended Covid-19 lockdowns to announce a hefty capital return program in August.

NAB’s announcement comes after rival bank ANZ earlier this month announced a $1.5bn buybacky. Picture: NCA NewsWire/Bianca De Marchi

NAB has shrugged off the impact of extended Covid-19 lockdowns to announce a wave of capital return to shareholders, with a $2.5bn buyback ordinary on-market shares set for August.

The buyback, which follows a similar move by ANZ earlier this month, equates to about 2.9 per cent of NAB’s market capitalisation and will help build capital levels towards its target range.

But with NAB shares trading at current market price of $25.83, the buyback represents a premium to the $14.15 a share of NAB’s $3bn capital rasing from institutional investors in July last year.

NAB chief executive Ross McEwan told the market the move would help the bank progress its Common Equity Tier 1 (CET1) towards its target ratio of 10.75 per cent – 11.25 per cent, above the 10.5 per cent “unquestionably strong” threshold set by the Australian Prudential Regulatory Authority.

“Our target CET1 range reflects a balance between retaining a strong balance sheet through the cycle, supporting growth and recognising the importance of capital discipline to improve shareholder returns,” Mr McEwan said.

“We consider the on-market buyback to be the most appropriate mechanism to achieve our previously stated bias towards reducing share count, which will help drive sustainable return on equity benefits.”

He added that the buyback was made possible by NAB’s strong performance over the last financial year.

“NAB’s strong financial performance, combined with the divestment of MLC Wealth, has created an opportunity for NAB to reduce our surplus capital while retaining a strong balance sheet during these uncertain times,” he said.

NAB also said it would continue to purchase shares on market to satisfy dividend reinvestment requirements over the buy-back period.

In a note to clients, Ord Minnett analysts said the buyback came earlier than expected given uncertainty over whether financial crimes cop AUSTRAC would penalise NAB for anti money laundering breaches, as well as the company’s interest in bidding for Citibank’s retail banking assets in Australia.

They also said they saw additional buybacks on the horizon.

“We incorporate $4.5b in buybacks, across 1H22, 2H22, and 1H23,” the analysts said.

NAB’s announcement comes after rival bank ANZ earlier this month announced a $1.5bn buyback, equating to 1.9 per cent of its market capitalisation, likely to start in August.

The scale of ANZ’s purchase surprised analysts, who had been expecting a larger program and are now eyeing the possibility of a follow-up program.

Prior to the latest pandemic lockdowns, banking analysts had tipped the majors would start returning capital this year, and Morgan Stanley had pencilled in expectations of $15bn being returned across the sector.

CBA had been widely expected to be the first bank to move, but has not so far announced any buyback program.

Earlier this month analysts at Citi tipped that CBA would announce a $5bn off-market buyback at its fiscal 2021 results in August. Ord Minnett analysts on Friday said an off-market program would be followed by on-market share purchases.

“We expect CBA to launch a $5bn off-market buyback at its FY21 result in August, and $4bn of on-market buybacks over the following two halves,” they said, adding they expected a $5bn off-market buyback from Westpac later this year.

Goldman Sachs said CBA would hand down 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.

The big four banks have large capital buffers above the banking regulator’s unquestionably strong threshold, as they held onto proceeds from asset sales during the pandemic uncertainty last year.