Bank profits may have peaked. Are they still a buy for investors?

He says ANZ’s decision to offer a special dividend of 13¢, which boosted the final dividend to compensate shareholders for a lower level of franking because of its higher level of offshore earnings, highlights how shareholder management is a key part of the banks’ approach to performance and risk.

“They’re very cognisant of who their shareholders are, and they’re very stable in terms of how they deliver earnings and dividends,” he says.

While he believes the banks are arguably at peak earnings, their capital levels remain “incredibly strong”. Mr Storey suggests that even if cash earnings fall over this financial year, banks have room to lift the proportion of profits they pay out to shareholders to maintain returns.

“What the banks will do is they’ll probably run at the higher end of the dividend payout ratios, so there aren’t really going to be any dividend cuts coming through.”

Some analysts, however, forecast ANZ’s dividend payments to fall in this financial year.

Barrenjoey’s Jon Mott, for example, expects ANZ to reduce its total dividend of $1.75 per share to $1.62 this year, reflecting lower cash profit, and to hold it at that level for the next five years.

Mr Mott, however, expects the other banks will hold dividends at current levels – in terms of dollars paid out – as they pay out a higher proportion of overall profits.

At Morningstar, banking analyst Nathan Zaia says that while competition for mortgages and deposits has squeezed all banks’ margins, he feels “pretty comfortable” about the banks as an investment. He predicts profits will weaken into 2024, but says the banks’ dividend payouts indicate the banks’ boards are “more optimistic about the outlook” than those on the sell-side.

“There’s definitely room to hold dividends at least where they are, if not increase them modestly next year, even if earnings are softer,” he says. “[Boards] do like to provide shareholders in these companies with some consistency, so they try to peg it a level they can hold and grow over the next couple of years.”

Paul Moran, a financial planner at Moran Partners, says an increase in the banks’ underlying cash profits indicates there’s “no threat” to dividends. Any time there’s a cash profit that increases faster than inflation, dividends are likely to increase faster than inflation, he adds.

“It means I get an inflation-protected income stream,” he says. “Even ANZ, where the results disappointed, still shows that increase in cash profit faster than the rate of inflation.”

While banks’ term deposits, have grown significantly, they’re still not paying as highly as a fully franked dividend. “And I’m getting some growth in that dividend, I’m getting no growth in the term deposit,” Mr Moran says.

The big bank pick

UBS’s John Storey: We like CBA quite a lot, and it’s a very non-consensus view. But we think they have a lot more levers to pull on to sustain their dividend at these types of levels.

Morningstar’s Nathan Zaia: Westpac. That’s the one that nobody loves, and it’s the one where there’s probably a bit more risk in terms of execution of simplifying its technology. Its cost-to-income ratio is much higher than its peers at the moment, but it probably shouldn’t be over time, so we’re optimistic that they’ll be able to improve relative to their peers.

Moran Partners’ Paul Moran: I think NAB. It’s not as expensive as CBA. It’s got a pretty solid business banking arm, as well as home lending. But it hasn’t got as big a home lending arm as some of the others, so it’s less subjected to any crunch in the home lending market.