Sept. 2 (Bloomberg) -- Westpac Banking Corp., Australia’s largest lender, and its biggest rivals may begin returning A$16 billion ($13 billion) of capital to investors next year as bad debts ease, according to Credit Suisse Group AG.

“A lot of capital’s going to get released,” James Ellis, a banking analyst at Credit Suisse, said today at a media briefing in Sydney. “We’ll see a capital management theme coming through. Stock buybacks have been the mechanism traditionally used.”

Funds will be available for shareholders even after accounting for potential takeovers by Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd., Ellis said. Capital ratios, key measures of banks’ financial strength, will climb without additional fundraisings as the risk of defaults diminishes with the financial crisis coming to an end, he said.

Australia’s four largest banks, including Commonwealth Bank of Australia, have bolstered capital ratios to protect themselves from a surge in soured loans. Those bad debts will peak this year, and after that, excess funds will become a drag on earnings per share, according to Credit Suisse.

Australia’s biggest banks may also be more likely to consider buying Suncorp-Metway Ltd., the Australian banking and insurance company that last week reported a 40 percent slump in fiscal-year profit, because it’s easier to evaluate potential bad debts, said Arjan van Veen, a Sydney-based insurance analyst at Credit Suisse.

“They’re much more willing to do a transaction at the right price,” he said. “There’s been a shift in sentiment among the major banks.”

Bidders may have to pay about A$4.9 billion for Suncorp’s banking business, based on 1.8 times the division’s net tangible assets, van Veen said.

Jamin Smith, a spokesman for Suncorp, said it’s not appropriate for the company to comment on analyst research.

To contact the reporter on this story: Angus Whitley in Sydney at awhitley1@bloomberg.net

Last Updated: September 2, 2009 02:10 EDT