Lockdowns could shrink or delay bank buybacks: CBA likely to give back $5 bn

  • By Elizabeth Fry

Morgan Stanley says while the market expects the banks to launch large share buybacks this year, the uncertainty created by the current lockdowns could see them either delayed or pared back. 

The broker’s banking analyst Richard Wiles said ANZ’s recently announced plan to launch a “modest” $1.5 billion buyback last week - taking its tier one capital ratio to 11.7 percent - suggests the prudential regulator is comfortable with buybacks which cut the banks’ CET1 ratio to this level. 

Currently, the banks' average proforma ex-dividend CET1 ratio stands at 12.4 percent.  

According to Wiles, this implies a capital stash of $31.5 billion over and above APRA's "unquestionably strong" benchmark of 10.5 percent. 

If the rest of the big four aim to land at ANZ’s 11.7 percent, then Commonwealth Bank could return as much as $6.6 billion to its shareholders. NAB could release $2.5 billion in buybacks with Westpac giving back $2.4 billion. 

However, the uncertainty created by the current lockdowns - a hard lockdown in New South Wales - might persuade the banks to wait until things become clearer. 

Risk of an extended Sydney lockdown 

The broker’s base case is that CBA announces a $5 billion buyback in August, but that Westpac and National Australia Bank adopt a "wait and see" approach.  

"We think the growing risk of an extended Sydney lockdown increases the probability that CBA downsizes or delays the announcement of a buyback at its full-year result on August 11,” said Wiles. 

“However, our analysis suggests that it could undertake a $5 billion off-market buyback and still maintain an ex-dividend CET1 ratio of around12 percent.  

“In our view, Westpac and NAB have the choice between an "earlier and smaller" buyback like ANZ, or a "later and larger" one in FY22.” 

Given the current lockdowns, Wiles doesn’t expect either to announce a buyback in August. He thinks Westpac will launch a $3.5 billion off-market buyback and NAB to commence a $4 billion on-market buyback when it presents its first-half results in May 2022.  

However, he went on to say, these may be brought forward to November, subject to progress on the National Cabinet’s four-phase pathway out of Covid and APRA’s capital framework reform.  

“The size and timing of any buyback by NAB are also likely to be influenced by the outcome of its discussion with Citigroup about buying its Australian consumer business and the financial crime agency’s formal enforcement investigation,” he continued. 

The broker said its forecasts do not incorporate any civil penalty or additional capital charge resulting from the Austrac matter, while the acquisition of Citigroup's business could require between 25 and 40 basis points of capital.