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ANZ has the cash to buy back stock, returning money to shareholders: analysts

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ANZ Bank’s bid to become a smaller but higher-returning bank has sparked predictions the lender could return billions in capital to shareholders by buying back its own shares.

After the bank on Tuesday showed it was generating substantial capital as it hives off poorly performing assets, several analysts believe the lender will have more capital than it needs to satisfy the regulator, and return some of this to shareholders.

ANZ is generating substantial capital as it dumps lower-returning businesses and cuts costs. ANZ is generating substantial capital as it dumps lower-returning businesses and cuts costs. Photo: Jessica Shapiro

That could take the form of a multi-billion dollar share buyback, analysts said, though this would not occur until the banking regulator settles on how much capital banks must hold against mortgages.

The Australian Prudential Regulation Authority is expected to finalise its decision on bank capital, which protects lenders against a downturn, in the coming months.

ANZ CEO Shayne Elliott said on Tuesday he would push ahead with lowering the bank's costs and lifting returns for investors. ANZ CEO Shayne Elliott said on Tuesday he would push ahead with lowering the bank’s costs and lifting returns for investors. Photo: Ben Rushton

Under chief executive Shayne Elliott, ANZ has dumped lower-returning businesses, especially in Asia, launched a cost-cutting drive, and set its goals on becoming a smaller but higher-returning bank.

While the bank’s $3.4 billion profit performance on Tuesday disappointed investors, the result showed the bank’s top tier capital was 10.1 per cent of assets, making it the best capitalised of the big four.

This ratio is likely to climb significantly higher as ANZ sells of Asian retail assets, and there is an expectation is will also sell its remaining stake in China’s Bank of Tianjin.

Macquarie analyst Victor German said in a note this would take the bank’s capital ratio to 11 per cent, and he said there was potential for share buybacks, a move that would increase earnings per share (EPS).

“The key positive in this result was ongoing organic capital build-up,” wrote Mr German, who has a neutral rating on the stock.

“Given ongoing capital build-up we have now incorporated a capital return benefit of $3 billion to $4 billion.”

Citi’s Craig Williams said that although ANZ Bank’s road ahead appeared “bumpy” considering the weak revenue in its core Australian business, a “significant” capital management initiative appeared more likely.

“We are more confident ANZ can grow EPS through significant capital initiatives following the completion of the divestment program and finalisation of APRA capital rules,” wrote Mr Williams, who also has a neutral weighting.

Morgan Stanley’s Richard Wiles, who has an overweight rating on ANZ, also lifted his estimate for how much capital ANZ would deploy on buybacks in 2018-19, from $5 billion to $6 billion. 

ANZ shares were down 1.8 per cent to $31.66 shortly after midday on Wednesday.

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