The big four banks are struggling to generate much growth, and will likely see earnings growth fall into negative territory this financial year. Their much-loved dividend growth could also be under threat.
Westpac Banking Corporation (ASX: WBC) today reported a 2% increase in full-year cash profit, continuing the trend of lower bank earnings this financial year. Australia and New Zealand Banking Group (ASX: ANZ) reported zero (0%) growth in cash earnings per share while cash profit grew just 1.4%.
Even the mighty Commonwealth Bank of Australia (ASX: CBA) saw cash earnings growth of just 4.6% in the 2015 financial year (FY) while National Australia Bank Ltd (ASX: NAB) managed to buck the trend with growth in cash earnings per share of 9.4%, but was coming off a 15% fall in cash earnings in FY 2014.
As you can see from the following chart tracking cash earnings per share growth, ANZ, CBA and Westpac have all reported materially lower earnings growth.
Over the past four years, the ANZ, CBA, NAB and Westpac have managed to generate average growth in cash earnings per share of 4.5%, 6.4%, -1.9% and 4.5% respectively.
Westpac CEO Brian Hartzer suggested that this might be a 'new normal' for the Australian banks, under a "'lower-for-longer' environment, with modest credit growth, intense competition and ongoing regulatory uncertainty."
Mr Hartzer was expecting housing credit growth to ease – no surprise there as investors were being discouraged from borrowing thanks to higher interest rates and bigger deposit requirements. Falling house prices appear to be on the cards too, following a large surge in median house prices in our major capital cities over the past year or so.
But he was positive about business picking up and growth in the wealth and insurance markets. All four banks generate significant earnings from non-traditional banking services such as wealth management, including financial advice and funds management.
That might not be enough to save bank earnings and dividends from falling, though.
One key factor allowing the banks to grow earnings so strongly in recent times has been record low levels of bad debts. If Australia's economy eases further, bad debts will naturally rise, just as revenues slow, hitting the banks in a double whammy.
Foolish takeaway
In the past 3 months, the big four banks have seen their share prices hammered, with all of them falling by more than 10% while the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is down 7.5%. There's not much value in receiving a 5% or 6% fully franked dividend yields if capital losses are larger and dividends are at a high risk of falling.
Most investors would probably say, "Ok, I'll sell when I see the banks are forced to cut dividends", but that might be like trying to be first out the door when the lights snap on and the party ends.
