...Exactly, as I said early this morning, big banks undertaking huge share buybacks implies they see no other growth options. And that does not reflect well on the economy, nor the banks outlook going forwards.
...Banks make money by lending. And lending growth is important. Now it appears banks are more concern over loan defaults than loan growth.
...and they're buying their shares back at possible the peak.
...sure, increasing EPS by reducing the share base is possibly the easiest and safest route, but why would the banks pay their CEOs so handsomely?
...and if I try to pre-empt these big banks, they're not likely to be generous in increasing their deposit rates should the RBA decide to lift interest rates. Because they have less need for the cash that they're using it to buy back their shares.
The sneaky bad news in the banks’ $4.5b buyback bonanza
ANZ joined the bank buyback party on Tuesday. Investors love getting excess capital back, but do these buybacks show the banks are short of growth options?
May 7, 2024 – 11.48am
ANZ brought the curtain down on the interim bank reporting season on Tuesday by again reminding Australian investors why they loved bank stocks so much. The $2 billion share buyback chief executive Shayne Elliott announced followed a $1.5 billion buyback at NAB and a $1 billion buyback and special dividend at Westpac.
These buybacks help justify why investors have sent the ASX 200 bank index up by 23 per cent since the end of November, compared with a 14 per cent increase in the broader market.
But there’s another, less optimistic message in that the banks are willing to buy back their shares when their valuations are stretched versus history, and when their profitability is under real pressure.
Put simply, they are running short of growth options. With returns in their retail segments depressed by intense competition on mortgages, with their simplified structures leaving little room for M&A, and with the broader outlook for economic growth subdued, the banks cannot find a better use for excess capital than handing it back to shareholders.
To be clear, shareholders would much rather see banks return capital than burn it by chasing dud growth options as they’ve done in the past. But the levels the banks’ share prices are trading at suggest investors see a period of growth and stronger returns ahead.
As Citi’s Brendan Sproules has pointed out, the banks are trading at 1.7 times book value, a level not seen since 2018, when their return on equity was 2 per cent higher than it is today.
Buybacks do boost the return on equity and earnings per share – key criteria in most bank remuneration plans. But this round of buybacks raises interesting questions about where long-term growth will come from. Investors need to choose – more carefully than ever – which banks they want to own.
And this mini earnings season has helped emphasise the growing differences between the big four’s strategies.
Elliott bristles slightly at the suggestion that ANZ is buying back its stock at elevated prices, arguing that its shares are inherently valued at what the market believes is a fair price.
But more importantly, he believes ANZ is getting the balance right between shareholders and growth, as it returns excess capital that has built up after regulators forced the banks to raise these levels following the global financial crisis.
“We’re investing more in growth than we have ever. But capital that is excess to requirements best sits in the hands of our shareholders than us,” he says.
“Importantly, we don’t run the bank to generate capital to buy back shares. But there’ll be times in the cycle when those things happen, just like there was a time in the cycle where we issued capital because we wanted to buy growth when we wanted to buy Suncorp Bank.”
Elliott is comfortable that the answers to ANZ’s growth challenges can be found across a business that is not reliant on a single profit engine. ‘Excellent result’
He was quick to emphasise these growing differences between ANZ and its peers as he spruiked what he declared was an excellent result: while cash profit for the six months ended March 31 was down 7 per cent, the $3.6 billion came in ahead of both Westpac and NAB, despite ANZ having a smaller market capitalisation than the pair.
As with NAB and Westpac, there was a sharp fall in ANZ’s earnings from its retail bank, which dropped 25.3 per cent as mortgage competition pushed the division’s net interest margin down from 2.4 per cent to 1.9 per cent.
ANZ is, of course, set to expand in retail banking through the aforementioned Suncorp acquisition, but Elliott says he is not concerned that the bank is doubling down on mortgages at precisely the wrong time. Rather, he’s happy to be buying at the bottom.
“Let’s remember what we’re buying. We are really buying 1.2 million customers, and ...we are buying $50 billion worth of deposits and our job is to really satisfy those customers and give them superior service,” he says. “If it was a golden time in retail, we would have had to pay a hell of a lot more.”
Elliott also joined his peers at NAB and Westpac in celebrating a more resilient result from his business bank, where the net interest margin and return on risk-weighted assets rose, despite lower cash profits and revenue.
Revenue rose almost 4 per cent in ANZ’s largest institutional division, with cash profit falling 4.2 per cent and returns rising from 3.4 per cent to 4.2 per cent.
“We know, and we’ve seen it in our peers, that the Australian retail and commercial market is subdued,” Elliott says.
“It’s got challenges – and hey, we have those challenges too. But we have options. And what you really saw here was the strength of having an institutional business come through.
“Inevitably, we spend 90 per cent of the time talking about the home loan market in Australia and the war for mortgages. Look, it’s really interesting, and it’s important, and people care about it. But that’s not our major line of business at ANZ.”
The way the institutional business is growing is a case in point. It is not being driven by lending but by ANZ clipping the tickets on the processing of a staggering $164 trillion in payments every year. Revenue in ANZ’s markets business rose 30 per cent half-on-half, with much of that growth coming from outside Australia.
Elliott emphasises that the growth in the institutional and markets business will be lumpy. But it’s an example of the diverging strategy ANZ hopes will separate it from the pack, and says investors aren’t valuing the longer-term growth in the revenue of the institutional business – from flat lining at about $5 billion a year a few years ago to around $7 billion now – as they should be.
“I don’t think they’re valuing ANZ properly,” he says of investors. “I’m more bullish on ANZ. I think our diversification has real value. We need to prove that we are growing.”
Another differentiator, in Elliott’s eyes, is ANZ’s record low bad debt charge – a surprise to the market – as evidence that his bankers are managing risk better than peers.
Elliott rightly worries about the impact of this on Australia’s economic growth, but there is a financial benefit to ANZ shareholders, with analysts expecting further provision releases given the resilience of the economy.
His rivals will make similar claims about their divergent strategies, of course: NAB is the leader in business lending, and this is also now Westpac’s biggest business. Commonwealth Bank remains Australia’s retail banking giant, but it too is pushing hard into business and institutional banking.
In an environment where the sector has shot itself in the collective foot with a mortgage war, and where the pressure on bank share prices could increase as the memory of buybacks fades, these differences will become increasingly important.
