Investors of ASX-listed bank shares have enjoyed the spoils of a rebounding economy. Yet, the best may still be to come as the big four Aussie banks deliberate over how to return an estimated $34 billion of excess capital to shareholders.
Analysts are already debating whether the returns will be via beefed-up dividends or share buybacks.
Let's look at what analysts are expecting.
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Big bucks from ASX bank shares
Despite a global pandemic, all of the big four banks delivered share price returns in excess of 40% over the past year. For shareholders, it has been somewhat bittersweet. While enjoying capital appreciation, they have had to suffer a hit to dividend payments.
However, with the economy springing back, those dividend cuts quickly stacked up as spare cash. Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking GrpLtd (ASX: ANZ), National Bank of Australia Ltd (ASX: NAB), and Westpac Banking Corp (ASX: WBC) are now all flushed with cash.
Analysts over at Morningstar estimate around $34 billion of excess capital will be returned to shareholders over the next few years. But the real question is, how will the spoils be shared?
Equity analyst, Nathan Zaia expects that all the ASX's major bank shares will make off-market buybacks in the next 12 months. Zaia forecasts the remaining capital to be returned through bigger annual dividends between 2021 and 2024. Additionally, Zaia sees on-market buybacks occurring once franking balances are run dry.
We think the Commonwealth Bank could kick things off in August 2021 with an approximate AUD 5.5 billion off-market buyback. However, the bank's conservatism around loan loss provisioning and dividends during 2020 and 2021 suggests shareholders may need to wait until 2022.
Divs or buybacks for CBA?
Morningstar analysts estimate Commonwealth Bank has around $10 billion of excess capital.
Based on the research firm's numbers, it considers CBA to be trading a significant premium to its fair value estimate of $77 a share.
Hence, Morningstar would prefer Australia's biggest bank to return capital via dividends. If the bank pursued this path, analysts estimate it could cover a 100% dividend payout ratio through to 2023.
At the time of writing, ASX bank shares are in the red. Furthermore, CBA is trading 0.40% lower to $99.47.
