The past two years have produced tremendous growth in company earnings, leaving many names with surplus capital on the balance sheet.
As a result, there's been a significant number of share buybacks announced by ASX-listed companies in 2022.
Whereas dividends typically steal the show, buybacks are making the rounds again as an alternative means of returning capital to shareholders.
Banks to increase pace of buybacks
Analysts at investment bank Citi reckon that ASX-listed banks are set to increase the pace of buybacks over the coming 12–24 months.
The broker said that banks would take some time to respond to the newly-implemented Basel III reforms that govern capital management in the banking sector.
As a result, banks are on the "cusp of the cycle" where the regulatory body APRA "thought we were two years ago".
"[C]onsensus is forecasting large bad debts, risk weight-intensive business credit is on a tear, and rates continue to drive [risk]," the broker said, adding:
We think that some of this capital 'disappearance' reverts, and there is a possibility of further buybacks in 2024 once some of the noise diminishes.
Where does Westpac sit?
With that, Citi said that Westpac was positioned best amongst the ASX banks to complete a buyback, and noted CBA's soon-to-be-completed $1.5 billion share repurchase program.
Meanwhile, Refinitiv Eikon data shows five out of 14 analysts recommend Westpac as a buy right now, with seven rating it a hold and another two analysts urging clients to sell.
The consensus price target is $24.35 from this list, indicating a deal of upside to be recognised if the number proves correct.
In its last financial report, Westpac had a dividend coverage ratio of 153%, whereas debt made up 70% of the bank's total capital base. It has more than sufficient cash flow from operations and cash on the balance sheet to meet the demands of a share buyback.
Westpac also trades on a price-to-earnings (P/E) ratio of 15.3x and a trailing dividend yield of 5.75%. This is on earnings per share (EPS) of $1.37 and a trailing earnings yield of 6.51%.
