Bank shareholder returns in question

Australia's big four banks posted record headline profits in 2010 but the jury is
still out on the prospect for shareholders' returns over the next two years.
The major banks over the past week avoided using the word "record" to describe their
results, possibly in deference to the current political furore over bank profits and
interest rates.
After posting the biggest statutory profit in Australian banking history, Westpac's
chief executive Gail Kelly on Wednesday described the whopping $6.346 billion result
simply as "a very strong outcome".
She emphasised it was driven by tax consolidation adjustments for the St George
merger as well as the reduced impairment charges that helped drive record earnings
for Commonwealth Bank (CBA), ANZ Banking Group (ANZ), and National Australia Bank
(NAB) as well.
Australian Bankers' Association chief executive Steven Munchenberg later said in a
statement that banks' headline profit figures "are always large because they are
very large Australian businesses."
Westpac's statutory profit was 84 per cent higher than last year's and the annual
dividend 20 per cent higher at 139 cents per share.
Cash earnings, which takes out unrealised losses and gains on asset values, gained
26 per cent on the previous year to $5.879 billion - second only to CBA's $6.101
billion cash profit result.
Credit Suisse analysts Jarrod Martin and James Ellis said Westpac's cash earnings
result was in line with expectations, but like its peers, Westpac's annual dividend
beat consensus estimates.
That will please shareholders, but analysts say big bank shareholders wanting a
repeat performance may be disappointed.
Although Australia's big banks are much stronger than their global peers, and
together delivered record profits of $28.5 billion in 2009/10, the profits do not
represent spectacular returns for shareholders, KPMG's head of Australia banking
Andrew Dickinson said.
"While dividends are up significantly this year, they're still not at what they were
three years ago."
"The banks' returns will be more modest now than they were in the early 2000s."
Across the big four, the return on equity (ROE), a measure of profitability on
shareholders' investment, is around 15.9 per cent - better than the previous year
but still four per cent below pre-crisis levels, Mr Dickinson said on Wednesday.
Given big capital raisings undertaken by the banks in 2009/10 and upcoming
regulatory changes forcing banks to hold more capital, it is unlikely ROE will
return to 2007 levels of around 20 per cent, he said.
"Getting that same return on that equity is going to be a challenge."
"ROE this year went up from about 13.7 per cent to 15.9 per cent - I think that's
probably where it's going to sit for the medium term around 16, 17 per cent."
The key feature of the 2010 earnings season was the significant drop in impairment
charges recorded by all banks from the peak of the crisis-induced bad debt cycle in
2009.
PwC banking leader Mike Codling said underlying core earnings across the majors
firmed just 1.5 per cent in 2009/10 after stripping out impairment charges.
Westpac's chief financial officer Philip Coffey told analysts he expects a further
decline in impairment charges in 2010/11, after reporting a 55 per cent drop in
2009/10 to $1.456 billion.
Impairment charges across the big four fell to $8.5 billion in 2009/10, and Mr
Dickinson said they were unlikely to return to pre-crisis levels.
"I think it's going to take probably two to three years to wind back to something
that might be more sustainable, around the $4 billion mark," he said.