Australia & New Zealand Banking Group (ANZ) is likely to proceed with a major share buyback programme, if, as expected, it sells its ANZ Grindlays Bank (Grindlays) unit to Standard Chartered for A$2.5 billion ($1.5 billion). The sale would result in a profit of around A$1.5 billion for ANZ, which has Grindlays on its books for around A$1.0 billion, almost doubling the bank's excess capital and paving the way for a buyback approaching A$3.0 billion - enough to buy in some 16% of its shares at current prices.
Market talk suggests ANZ chief executive John McFarlane plans to step down within the next six months and has given assurances shareholder value will have improved by then. Certainly, the quickest way to achieve this would be via a share buyback and the company has shown an appetite for returning value to shareholders in this way having spent A$509 million acquiring 3% of its shares since November.
The sale of Grindlays would also likely put the brakes on a planned offering of securities in New Zealand, which is scheduled for May. The securities would be New Zealand dollar-denominated and designed to track the Australian shares, with full dividend payouts attached. However, if Grindlays is sold for A$2.5 billion - a high price, say analysts - ANZ will have no need for further cash. A similar offering of New Zealand securities by Westpac Banking Corp has failed to keep pace with the Australian shares and this will be a further reason for ANZ to scrap the issue.
"The Westpac issue should make ANZ wary and ANZ really won't need the money," says one analyst.
If ANZ, the smallest of Australia's four main banks, goes ahead with a buyback, instead of trying to acquire a life insurance and/or fund management business at home, it may be setting itself up as a takeover target for one of the world's major banking groups. The three biggest Australian banks, namely National Australia Bank, Commonwealth Bank of Australia and Westpac, are barred from making an offer under Australia's "four pillars" policy, developed in the late 1980s to promote competition.
So far, neither Standard Chartered nor ANZ has confirmed a Grindlays deal is imminent, though reports indicate an announcement is likely in the first week of May at the latest.
Standard Chartered spokesman Paul Marriage says: "We are always interested in growth, either organically or by acquisition, but we are not going to comment on market rumours."
Standard Chartered has recently indicated India, where Grindlays has its biggest presence, is an area it would like to grow in. The UK bank, which last month raised 1.0 billion Eur ($947 million), is also looking to expand in Indonesia, Taiwan and Thailand. Standard Chartered last year acquired 75% of Nakornthon Bank for 12.38 billion Bt ($326 million), but an attempt to take control of Bank Bali was subsequently aborted.
Standard Chartered currently has around 20 branches in India and Grindlays just short of 60. Together, the two would become the single biggest foreign bank in India.
"The combined entity's market share would be close to 3%, which is meaningful but not dominant by any stretch of the imagination," says Amit Rajpal, analyst at Morgan Stanley Dean Witter.