Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) reported their half-year results to the market earlier this week.
Westpac reported modest low-single-digit profit growth, but was punished by the market.
ANZ Banking Group reported a 24% drop in profit, yet its shares flew higher.
While it may be too early to sound the alarm bells and run for the hills, there were a few themes within the reports that got me a little concerned.
- Impairments.
Impairments to assets (remember banks classify loans as assets) increased during the half year. That could be a direct result of exposure to the mining and resources sector, which has been doing it tough lately. It may also be a product of sour loans to some of the recent corporate disasters like Slater & Gordon Limited (ASX: SGH) or Dick Smith Holdings Ltd (ASX: DSH). Worse still, it could also be a sign of things to come.
Whatever the catalyst for higher impairments, the fact is impairments and bad debts will shrink bank profits as the business cycle plays out. For investors, it could be very costly to buy bank shares now if we do indeed experience a cyclical uptick in these costs.
- Dividends.
Westpac held its dividend flat while ANZ's board cut their payout. Of course, falling bank share prices have compensated buyers of bank shares for the lack of dividend growth that is likely to ensue.
However, if further cuts to dividends are necessary to meet the regulator's capital requirements or boost their balance sheets, the market may be merciless in selling down their shares.
- Patchy outlooks.
The outlook statements provided by the banks' top brass weren't very compelling. One executive focused on a patchy outlook for credit markets while the other was fixated on rebuilding his bank. Automatically, low-growth expectations warrant lower valuation multiples for shares.
Foolish takeaway
The banks are good businesses in their own right. However, not everything is rosy in the banking sector at this time, so investors would be wise to seriously contemplate the risks associated with any investment before buying in.
