All eyes on banks as reporting season begins

Adam FarrallCountryman

There has been added interest in the banking sector leading up to the current profit reporting season.

The major bank’s shares have rallied about 25 per cent in the past few months and there seems to be a conflict between the actual growth prospects and the large scale shift to yield on the share market.

Include the European debt issues, the drop in commodity prices and the well-documented problems the retail and property sectors have faced, one would think that this would have to filter through to the bank’s balance sheets?

The bank profit reporting season officially commenced last week, I say officially as ANZ and Macquarie both announced their results. However, some market followers may have noticed that National Australia Bank (NAB), although reporting on October 31, jumped the gun back on the 19th to warn the market that it was going to raise debt provisions due to economic-cycle weakness and pay a final dividend of 90 cents per share.

Excluding the debt provisions the company’s cash earnings were slightly below expectations, but broadly in line with the previous quarter.

NAB said lower levels of consumer and business confidence had reduced the outlook for growth.

ANZ’s result further confirmed the trend of challenging conditions in the banking sector, with underlying profit reaching $6 billion for the year, also being in line with analyst expectations.

Although credit costs were marginally higher, impairments were down which along with the regional growth strategy was the major difference in comparison to NAB.

The company also increased the final dividend to 79 cents per share.

Macquarie Group (MQG) reported that first-half profit had risen 18 per cent compared with the corresponding period, however, that was down on the second half of last financial year.

Increased activity in the trading and funds arms of the company were the main drivers, which is why we view the company as a barometer of the share market. If the market is performing and volume is up, Macquarie is the major benefactor — likewise if it goes the other way.

While still waiting for Westpac to report (November 5) and Commonwealth Bank to issue a trading update (November 7), unless there is an unexpected surprise we presume the theme of reduced credit growth and a focus on cost cutting and productivity will continue.

ANZ’s regional growth strategy into Asia seems to be the major difference that could give further upside for shareholders in the future.

While the results do not reflect the share price performance of recent times, it confirms that while interest rates threaten to go lower the yield play — that is, investors seeking out high yielding shares such as our banking stocks — is very much alive on the share market.

With this in mind more adventurous investors may wish to consider some of the ‘second tier’ or regional banks, which are currently offering dividend yields of above 7 per cent fully franked.

The other consideration investors need to remember when dealing with high-yielding fully franked stocks is that international investors do not get franking.

What this means is that if a stock has risen considerably prior to a dividend it may be more beneficial for an international investor to sell the stock and buy it back after the dividend, than hold it for the dividend and risk having the stock fall the dividend plus the franking amount.

This on occasions can actually see a stock fall prior to the dividend.

''Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time.

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