The combined profits of Australia’s big four banks likely exceeded $15 billion in the first half, as lenders started to benefit from a round of late 2016 interest rate hikes and strong home loan growth.
Big four investors have enjoyed share price gains of more than 6 per cent so far this year, and half-year results from three of the big four in the coming weeks are expected to show profits also ground higher across the industry.
The market expects solid profit growth when half-year results from ANZ, NAB and Westpac are delivered in May. Photo: Paul Rovere
Even so, there remains a question mark about whether National Australia Bank and Westpac can sustain their dividends, as the industry prepares for looming rules that may force lenders to set aside billions more in capital.
ANZ Bank will kick off the half-year bank reporting season this Tuesday, with analysts tipping a $3.5 billion cash profit in the six months to March, and a flat interim dividend of 80¢ a share.
National Australia Bank on Thursday is tipped to deliver earnings of $3.25 billion and also keep its dividend flat.
Macquarie Group, whose share price last week closed at $93, not far off its 2007 record high of $97.10, is tipped to deliver a full-year profit of more than $2.1 billion on Friday.
That would exceed last year’s record of $2.06 billion for the investment bank, which will be among the biggest local winners from promised company tax cuts in the United States.
Next week, Westpac’s profits are expected to exceed $4 billion and Commonwealth Bank, which reports on June financial year, will post a quarterly update, after it notched up half-year profits of $4.84 billion in February.
Profits have likely grown across the industry on the back of housing credit growth of 6.5 per cent in the last six months, analysts believe, propelled by higher house prices in Melbourne and Sydney.
There are few signs of distress in banks’ loan books, and a round of interest rate hikes targeted at property investors in late 2016 may have also helped earnings.
“We expect near-term earnings to be well supported by mortgage repricing benefits, investor-led credit growth, benign credit environment and solid trading income,” said Macquarie analyst Victor German.
However, there remains some debate in the market about whether Westpac and NAB can sustain their dividends in the face of higher capital requirements.
Both lenders’ dividend payout ratios are already stretched, and some believe a cut in the dividend would make sense, though this is not the consensus view.
CLSA analyst Brian Johnson is forecasting Westpac will cut its dividend, in the expectation banks will have to build up more capital to satisfy looming changes from the banking watchdog.
Mr Johnson noted ANZ Bank was applauded in the market when last May it cut its dividend for the first time since the global financial crisis.
“I just cannot believe they can be as confident on their capital strength,” Mr Johnson said.
Credit Suisse analyst Jarrod Martin highlighted dividends as a key issue for NAB, pointing to its high payout ratio, but said he believed the payout would remain flat.
Some are also sceptical about whether the gains to banks from hiking rates may be cancelled out by stiff competition for loans, which has led to discounting for customers.
Senior analyst at Regal Funds Management, Omkar Joshi, said banks’ margins were likely to have contracted, as the bulk of recent interest rate hikes by banks occurred at the end of their first half, which ends in March.
While these interest rate hikes will likely boost bank margins over the next six months, there is also a risk that too many rate rises will cause some highly-geared borrowers to struggle to meet their repayments.
“At what point does re-pricing start to hurt asset quality?” Mr Joshi said.