Banks to opt for dividends after buyback crackdown

“On a relative basis, Westpac and the regional banks are more impacted,” they said.

“We see higher payout ratios and special dividends as the most likely avenues.

Westpac to feel the most impact

“We believe fundamental valuation will be impacted, with some franking credits likely to be permanently trapped.”

Companies can pass on franking credits to shareholders for company tax paid.

Westpac would feel the most impact from the share buyback crackdown because it has the largest franking credit balance on its balance sheet at $3.1 billion.

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Commonwealth Bank’s franking balance has fallen to about $1.4 billion after conducting share buybacks over the past two years.

National Australia Bank has an estimated $1 billion franking credit balance, and ANZ’s franking balance is about $770 million.

Bendigo Bank has about $630 million in franking credits and Bank of Queensland has about $580 million – relatively large compared to their profits and shareholder base.

Off-market share buybacks have been a tax-efficient way to stream franking credits to select shareholders.

Shareholders opt in to selling their shares, often at a discount to the market price.

The shareholders are compensated for the price shortfall by the company distributing franking credits as a large portion of the capital return to investors.

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The mechanism is more advantageous than an on-market buyback, which would impose more capital gains tax on the shareholder selling their shares.

Typically, low-tax shareholders such as superannuation funds and self-funded retirees opt into the off-market buybacks because the franking credits are more valuable to them and they can get a cash refund from the government.

Offshore investors cannot use franking credits.

Companies including BHP, Rio Tinto, CBA, Westpac, Woolworths, JB Hi-Fi, Metcash and Caltex have used the off-market share buyback strategy.

The Macquarie analysts said: “While we didn’t expect banks to conduct off-market buybacks in the near term, with healthy franking balances and potential future divestments, franking credits presented value to shareholders, which are likely to now be trapped.

“However, following the proposals, management may need to reassess the capital management policy to distribute excess franking.”

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