ANZ on-market buyback boosts bank investor confidence

From

Peter Gardner

Specialist income investment management firm, Plato Investment Management, says ANZ’s $1.5 billion initial on-market buyback is another strong indicator of a strengthening outlook for ASX income investors.

“While economic risk with regards to the continued spread on COVID remain, we think this announcement by ANZ is a strong signal that bank dividends are likely to continue to increase over the next 12-24 months,” said Dr Peter Gardner, Senior Portfolio Manager of Plato Investment Management.

“In the banking sector broadly we’ve seen in recent months a significant write-back of provisions and strong increases in cash earnings. This strength isn’t just evident amongst the big four but also within other financial services groups such as Bendigo and Adelaide Bank and Macquarie.

“The buyback is a prudent approach to capital management, with it likely to reduce ANZ’s Common Equity Tier 1 capital ratio by 35 basis points to around 12.2%, still well above APRA’s unquestionably strong level of 10.5%.”

Dr Gardner believes the ANZ on-market buyback is likely to be followed by off-market buybacks by some of ANZ’s competitors.

“ANZ does not have excess franking credits, so an off-market buyback was never on the table. As we know off-market buybacks can be tax-effective and quite lucrative for income investors, particularly retirees and other low-tax investors.

“CBA and Westpac do have the franking credits to do off-market buybacks, which we think remain likely to occur in the foreseeable future. We think Commonwealth Bank remains the most likely candidate, with a very strong balance sheet and more excess capital than its peers.

“The fact APRA and the boards are willing to consider buybacks at this time strengthens the case for more to come.

The Plato Australian Shares Income Fund aims to take advantage of off-market buybacks for its clients, and will be tendering all shares in the recent Metcash buyback. Buybacks have generated 0.4% additional after-tax alpha for the fund since its inception.

The Plato Australian Shares Income Fund has delivered 9.3% income per annum (Including franking credits and special dividends) since inception on 9th September, 2011.

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