NAB (ASX:NAB) share price on watch after announcing $2.5bn buy-back

The recent lockdowns aren’t stopping this banking giant from returning capital to shareholders…

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All eyes will be on the National Australia Bank Ltd (ASX: NAB) share price this morning.

This follows the announcement of a major capital return by the banking giant.

Why is the NAB share price on watch?

This morning NAB announced that it intends to buy back up to $2.5 billion of its ordinary shares on-market. The bank advised that this is part of its plan to progressively manage its Common Equity Tier 1 (CET1) ratio towards its target range of 10.75% to 11.25%.

According to the release, subject to market conditions, NAB expects to commence the buy-back in mid to late August.

NAB’s Group Chief Executive Officer, Ross McEwan, commented: “Through the pandemic, NAB has continued to build its financial strength while providing significant support to our customers and colleagues.”

“Our support for customers and colleagues continues through ongoing lockdowns and as the COVID19 situation evolves. At the same time, NAB’s strong financial performance, combined with the divestment of MLC Wealth, has created an opportunity for NAB to reduce our surplus capital while retaining a strong balance sheet during these uncertain times,” he added.

Why buy back shares?

Mr McEwan revealed that NAB believes the buy-back is the most appropriate way to return funds to shareholders.

He explained: “Our target CET1 range reflects a balance between retaining a strong balance sheet through the cycle, supporting growth and recognising the importance of capital discipline to improve shareholder returns. We consider the on-market buy-back to be the most appropriate mechanism to achieve our previously stated bias towards reducing share count, which will help drive sustainable ROE benefits.”

More buybacks to come?

The good news for shareholders and the NAB share price, is that this may not be the last buy-back.

The bank notes that it continues to operate well above APRA’s Unquestionably Strong benchmark of 10.50%. Its CET1 capital ratio stood at 12.37% at Level 2 and 12.40% at Level 1 as of 31 March 2021.

This $2.5 billion on-market buy-back will reduce the CET1 capital ratio at Level 2 by around 60 basis points. However, after accounting for the buy-back, the sale of MLC Wealth to IOOF Limited (ASX: IFL), and other previously announced items, NAB’s pro forma March 2021 Level 2 CET1 ratio is 12.15%.

This is well above the high end of its target range of 10.75% to 11.25%, giving it at least 90 basis points of slack. This works out to be ~$3.75 billion of surplus capital that could potentially be returned to investors down the line, by my calculations.

Though, NAB has warned that any future capital returns will be dependent upon market conditions and its capital outlook.

The NAB share price is up 42% over the last 12 months.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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