Bank dividends good for now
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Christine St Anne is Morningstar's online editor.
The recent announcements made by three of the big four banks contained little surprises.
For the first half of fiscal 2012, Westpac (WBC) cash earnings rose 1 per cent to $3.195 billion, consistent with Morningstar's forecast.
In the same period, National Australia Bank (NAB) announced its cash earnings rose 5.7 per cent to $2.82 billion, the result also roughly in line with Morningstar's forecasts.
Meanwhile the Commonwealth Bank of Australia (CBA) announced that its third-quarter profit rose 29 per cent with unaudited cash earnings climbing to $1.75 billion.
While there were no surprises the results did reflect that Australia's banks are in for a period of subdued earnings growth coupled with higher funding costs.
The CBA noted in its announcement that lower credit demand and higher funding costs continued to impact on revenue and net interest margins. WBC also revealed a fall in its net interest margin due to the re-pricing of its lending being insufficient to offset higher funding costs.
Despite these challenges, the latest report from KPMG noted that Australian banks continued to perform well on the global banking stage.
"Australian banks are well capitalised, continue to maintain strong liquidity positions and are well placed to respond to new global capital and liquidity rules," KPMG head of financial services Michelle Hinchliffe says.
It seems banks are also on track to maintain their record of delivering high-dividends. Westpac's fully-franked dividend of 82 cents a share beat Morningstar's expectations of 78 cents a share while NAB paid an interim dividend of 84 cents a share for the same period in the previous year.
"Dividends were up which we expected," Morningstar head of banking research David Ellis says.
Ellis says that a lot of people did find that surprising. The results, he says is indicative of the major banks ability to generate strong amounts of capital.
"With limited M&A [mergers and acquisitions] opportunities, moderate credit growth, improving asset quality and well-run boards, we expected the dividend story to improve for investors, at least over the medium-term," Ellis says.
According to Ellis, earnings growth won't be fantastic but by the end of the calendar year, the four major banks will have more capital than they need even under the tough BASEL III requirements.
"As the capital base increases, there will be a drag on the return-on-equity so within 18 months the banks will be undertaking capital management initiatives," he says.