Three of Australia’s top banks are set to report record profits this week, but did Macquarie tip their hand on Friday with a surprise lift in dividend?
That increase in the bank’s final dividend to $1 a share meant an unchanged payout for the year of $1.86, which is a recognition by the bank that its days as a capital gains investment and high priced shares, are over.
The other banks could well follow suit for a slightly different reason: they have always been about income and not capital gains (although all enjoyed strong growth in shares prices before the GFC).
The ANZ tomorrow, Westpac Wednesday and NAB on Thursday are expected to show the benefit of falling bad-debt charges and the big mortgage rate increase last November.
But the tenor of the outlook statements from the three reporting banks this week is likely to be more uncertain because of the very mixed nature of the way the economy is going and the immense pressure being placed on domestic activity by the strong dollar and consumer caution.
Weak demand for credit (especially for housing finance), cautious consumers, who are saving more than spending, and rising costs will make it hard for them to repeat these increases in the current half and into 2012.
But there has been a noticeable upturn in business lending this year. According to the RBA’s private credit data business lending rose by 1.0% the biggest rise in two and a half years (since October 2008).
While annual growth remained negative, with a fall of 0.6%, that was a significant improvement from the 6.2% annual rate in March of last year and 2.4% in January of this year.
The much forecast rebound in business credit seems to be happening, with the improvement running at an annual rate of nearly 8% in the March quarter, the strong for almost three years.
In contrast the 0.4% rise in housing credit in March was the lowest in a decade and the banks will be battling to revive that in the next few months.
Analysts believe interim results to be posted next week by ANZ, Westpac and National Australia bank will take the combined cash profit for the big four to about $11.8 billion — ahead of last year’s record $10.5 billion.
All three banks are likely to follow the Commonwealth Bank, which reported a record $3.34 billion cash profit in February (up 13%).
In fact the CBA boosted interim payout to shareholders by around 10% to $1.32 per share.
Credit Suisse is forecasting a first-half cash profit for NAB of $2.56 billion in the six months to March, up 18% from $2.19 billion in the same period a year ago.
ANZ is tipped to enjoy the biggest surge, up almost 25% to $2.85 billion.
At Westpac, cash profit is expected to edge up by around 3%-4%, to just over $3 billion.
Macquarie’s full-year profit of $956 million was down 9% thanks to the weak first half-result, higher costs (especially for staff) and the impact of the higher Australian dollar.
Macquarie’s second-half profit of $591 million saved the bank, rebounding strongly from the first-half profit of $411 million.
Like its bigger commercial peers, that improvement was helped by lower writedowns.
Macquarie’s bigger-than-expected final dividend of $1.00 per share (up from 86c in the second half of the 2010 year) left the full year payout steady on $1.86 a share.
But that was a higher proportion of profit (over 70%) against the normal level of 50% to 60%, meaning Macquarie management hopes higher earnings this year will return the proportion of earnings paid out to shareholders to more normal levels.
Macquarie shares end at $35.16 on Friday, up 26c on the day, after being sharply higher.
Macquarie’s full-year dividend of $1.86 represents a yield of 5.3%, which makes it an income stock at these levels instead of a $100 a share out performer.
That’s still a lower PE than Westpac with 5.8% (based on Friday’s close), ANZ, 5.5%, CBA, 5.7% and NAB, 5.9%
That’s a sign of the times and of the future Macquarie sees for itself.
But for the bigger banks, the outlook is clouded.
The boost from falling bad debt provisions is coming to an end the deeper we go into 2011 and the floods, patchy economy and weak housing demand will take their toll.
Analysts say that the continuing drop in costs for wholesale funding — the cash borrowed in international markets — and "structural cost reductions" are necessary for the banks to continue their recent "outperformance".
Don’t be surprised if banks start talking about restructuring and cost cutting later in the year.
