ANZ Banking Group: First cab off the rank in terms of capital management

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Former Senior Analyst
Date posted:
20 July 2021, 9:00 AM
Sectors Covered:

  • Australia and New Zealand Banking Group (ASX:ANZ) has announced an on-market share buyback program of up to $1.5bn commencing in August.
  • We have been highlighting capital management potential for all four major banks as one of the positive themes for the sector. ANZ’s announcement in the midst of lock-downs in Sydney and Melbourne should provide investors with increased confidence in the strength of major bank balance sheets.
  • Retain Add recommendation. ANZ is our preferred pick of the major banks.

On-market buyback to commence in August

Australia and New Zealand Banking Group (ASX:ANZ) has announced overnight that it intends to conduct an on-market buyback of up to $1.5bn of shares as part of its capital management plan.

The proposed buyback start date is 3 August 2021, and the proposed end date is 18 July 2022.

We have adjusted our forecasts for ANZ accordingly and we now forecast a CET1 ratio of 12.5% at end-FY22, equating to surplus CET1 capital (above a CET1 ratio of 11.0%) of $6.6bn. We therefore see potential for further capital management; ANZ has said that its “capital position may allow future capital returns to be considered”.

Market focus likely to increase on CBA

We have detailed in our report titled Underlying ROTEs show where value lies that we see capital management potential for all four major banks over our forecast period.

We believe ANZ’s capital management announcement will result in increased market focus on Commonwealth Bank's (ASX:CBA) potential capital management as CBA is scheduled to report its FY21 result next month. We continue to forecast off-market share buybacks of $11bn for CBA over FY22F and FY23F. While we believe the recent reinstatement of lock-downs in parts of Australia has reduced the probability of CBA announcing capital management alongside its FY21 result release, we still believe this is possible, particularly in light of ANZ’s capital management announcement.

While we expect plenty of focus on CBA’s capital management potential as it is the first major bank to report FY21 results, we again point out that the capital management potential for Westpac (ASX:WBC) in dollar terms – particularly after allowing for the potential sale of the life insurance business and Panorama platform – is not too dissimilar to the potential for CBA in our view. WBC’s capital management potential is also particularly exciting due to WBC’s relatively large franking credit balance.

As for NAB, we would not be surprised if National Australia Bank (ASX:NAB) waits for its AUSTRAC issue to be resolved before embarking on capital management.

Investment view and changes to forecasts

We have increased our cash EPS forecasts for ANZ by 1.0%/1.7% for FY22F/FY23F respectively as a result of the $1.5bn on-market share buyback announcement.

We retain an Add recommendation. We had already been reflecting capital management potential in our target price, and therefore our target price – based on our DDM valuation – remains unchanged at (login to view)

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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