ANZ Banking Group announced it will increase its current on-market buyback by $1.5bn to $3.0bn. This is at the upper end of the $1.0–1.5bn range that the bank guided to in early May following the receipt of reinsurance proceeds related to the sale of its Australian Life Business. We make the following observations:
So far this half, ANZ has brought back $308m in stock, leaving it a further $1.7bn to reach our second-half 2018 buyback estimate of $2bn. We see this as attainable, with the buyback accounting for an average of 14% of total traded volumes on the days it has been active.
ANZ indicated a pro-forma (31 March 2018) common equity tier-1 (CET1) ratio of 11.6%. This represents a 56-basis-point improvement on the reported first-half FY18 level after adjusting for the completion of the buyback, the receipt of reinsurance proceeds and the completion of already announced asset sales. This remains well above the Australian Prudential Regulation Authority’s revised capital baseline.
We expect ANZ to continue to take a conservative approach to its buyback, with the timing dependent on banking proceeds from asset sales.
Capital management remains a key plank in our investment thesis, and should see ANZ deliver sector-leading EPS growth – we estimate a three-year compound annual growth rate of 4.7%.
In FY19 and FY20, we forecast ANZ will commit to a further $6.75bn in buybacks at a run-rate of $2bn per half in FY19, before slowing to $1.75bn in 1H20 and $1bn in 2H20. This partly reflects our expectation of good ongoing organic capital generation due to the relatively low payout ratio of 65%. We maintain our Accumulate recommendation with a $31.20 target price.