National Australia Bank has launched a $2.5 billion on-market share buyback starting mid-August making it the second major bank to hand back surplus capital to shareholders this year.
The bank will return almost a third of the $7.8 billion surplus capital it had at March 2021.
The announcement came as no surprise to the nation’s banking analysts who expect the big four lenders to return as much as $31.5 billion to investors through buybacks.
The big four banks raised capital to deal with the pandemic and a worry about higher bad debts. But these failed to materialise.
“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,” NAB boss Ross McEwan said in a statement.
Morningstar banking analyst Nathan Zaia called the buyback sensible adding that last year’s equity raise was “too much.”
“In hindsight, it was not ideal that NAB raised equity at around $14 per share in 2020 and is now buying back shares at around $26 per share. But it is preferable to management feeling obliged to deploy the excess capital on making investments or aggressively growing the loan book,” he said in a note.
Citi analysts said with the announcement of a $2.5 billion initial buyback, NAB has stepped into a seemingly accelerated timeline for capital management following ANZ’s initial announcement.
“With these buyback announcements preceding market updates by a matter of weeks, we expect the timing reflects an opportunistic view of share price weakness given falling bond yields; a desire to manage share count into financial close; and a view, seemingly shared by APRA, that the Sydney lockdown will not be a credit event,” they said.
“With ANZ and NAB now having announced, we maintain our view that Commonwealth Bank will announce a $5 billion buyback in August and expect Westpac to quickly follow suit.”
Hitting the right capital target
The NAB chief executive told the market the move would nudge the bank towards its common equity tier one capital target of around 11.25 percent.
“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,” 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.”
NAB said it will also purchase shares on market to satisfy dividend reinvestment requirements during the buyback period.
The share buyback comes close on the heels of ANZ’s decision a few weeks ago to hand $1.5 billion back to shareholders through buyback programs.
Banking analyst Richard Wiles told Morgan Stanley clients that ANZ’s recently announced plan to launch a “modest” $1.5 billion buyback - taking its tier one capital ratio to 11.7 percent- suggests that APRA is comfortable with buybacks that reduce the banks' CET1 ratio to this level.
“Currently, the major banks' average proforma ex-dividend CET1 ratio of 12.4 percent implies there is $31.5 billion of capital over APRA's "unquestionably strong" benchmark of 10.5 percent,” he said in a client note.
Wiles said last week if the other banking majors aim for ANZ’s 11.7 percent then CBA could return as much as $6.6 billion to shareholders. " NAB could release $2.5 billion in buybacks with Westpac giving back $2.4 billion.”
However, the broker also expects CBA to launch a $5 billion buyback when it reports its annual full year result on August 11.