There aren't many reasons to love Big Bank stocks in this environment but Morgan Stanley may have uncovered one thing shareholders in Australia and New Zealand Banking Group (ASX: ANZ) can look forward to this year.
Any good news will be welcomed as ANZ share price has been underperforming the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) over the past year.
But then again, so has the share price of the other three Big Banks like the Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB).
Shares in the Big Four have dropped between 3% and 6% over the past 12 months when the top 200 stock index has rallied 6.5%.
One of the few things investors can look forward to are share buybacks from the Big Four as the banks look towards capital management strategies as growth slows.
This means there are fewer opportunities for banks to invest in their business and they have to think about other ways to better deploy their excess cash.
Morgan Stanley believes that ANZ is the only one of the Big Four that can lift its share buyback. In fact, the broker is tipping the bank will double its buyback to circa $3 billion this year and another $3 billion in the FY19.
Share buybacks may not put money directly into the pockets of shareholders in the way dividends do, but such programs will ultimately increase the value of ANZ shares, which in turn will lift the wealth of its shareholders.
This is because there will be fewer shares on issue and the bank's profits and dividends will then be shared across a smaller number of shares. Share buybacks benefits shareholders as they increase earnings per share (EPS) and dividend per share (DPS).
While ANZ has walked away from a deal to sell its UDC Finance business to Chinese conglomerate HNA Group, its asset sales program is expected to bolster the bank's funding flexibility and lift its CET1 ratio (the bank's buffer against its liabilities that's demanded by regulators) by 135 basis points.
"We now assume it completes ~A$1bn of the announced A$1.5bn buyback in 1H18E, with a further ~A$2 billion in 2H18E and ~A$3 billion in FY19E as asset sales are completed," said Morgan Stanley.
"In our view, these buybacks help mitigate a ~5% earnings hole from asset sales and the pressure on revenue from institutional 'rebalancing'."
The broker doesn't think the other three Big Banks will undertake any further capital management programs this year that has not been already announced.
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