Wet blanket banks spoil rate-cut party

Finally, the ASX 200 broke above 4400, surging on better than expected Chinese production data and the surprise 50 basis point cut by the RBA in the same trading session.

Interestingly, both mining and high-yielding stocks rose in unison, something which has not been a recent trend on the Australian market.

The only minor dampener was that the National Australia Bank (NAB), the Commonwealth Bank of Australia (CBA) and Westpac Banking Corporation (WBC) did not pass on the full extent of the rate cut opting for 0.32 per cent, 0.4 per cent and 0.37 per cent respectively.

We will have to wait on ANZ until its monthly rates update this Friday.

It was definitely all about the banks this week.

In between all the rates talk, ANZ and WBC also had their profit updates which were basically in line with expectations but clearly highlighted the weakening of the local economy.

ANZ was first last Wednesday when it announced that its first half profit had lifted by 10 per cent to $2.92 billion but said that the Australian business was declining.

Basically, the net profit rose on improving results from the bank's Asia, Pacific, European and American operations.

Chief executive Mike Smith said the bank's financial performance "was subdued, and significantly impacted by declining margins and the structural shift that's occurred since the financial crisis with the persistently lower demand for credit."

In simple terms, people aren't borrowing as much.

Underlying profit, the bank's preferred measure of performance, was $2.97 billion, up 6 per cent from $2.82 billion in the previous corresponding period.

ANZ declared an interim fully-franked dividend of 66 cents, up from 64 cents for the same period in the previous year.

WBC followed on Thursday last week and although the initial headline of a 25 per cent slump in first half net profit looked grim, it was mostly due an expected once-off tax consolidation from the banks previous acquisition of St George Bank.

The net profit fell from the record level of $3.96 billion to $2.967 billion with cash earnings of $3.195 billion which were all broadly in line with analyst forecasts.

The company declared a fully-franked dividend of 82 cents a share, up 2 cents from last year.

The management outlook statement indicated they are well positioned for growth, however they note growth will be slow and that funding costs will remain elevated.

Noticeably, these are the excuses all banks are using for not passing on the full RBA rate cuts.

In summary, this round of results have lead to some downgrades as the big four banks are trading above consensus price targets with limited projected earnings growth over the next two years.

The main factor to support or increase bank share prices at present is the RBA continuing to cut rates, thereby prompting investors (especially superannuation funds) to move from cash to higher yielding stocks.

The short-term risk to that switch, however, is the possible sell down post dividend leading into the end of financial year.

·If you would like to subscribe to Adam Farrall's weekly market update, contact him at Sentinel Stockbroking on 9225 0020 or email afarrall@sentinelgroup.com.au

_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. _