Westpac Banking Corporation’s (ASX: WBC) chief executive Gail Kelly is tipping a cut in the official interest rate in December, if the Reserve Bank holds fire today. 20 out of 26 economists are tipping a rate cut to 3%, according to Bloomberg.

Yesterday, the bank unveiled a 5% rise in its full year cash profit to $6.6 billion, although reported net profit fell 15% to $6 billion, when tax implications from its takeover of smaller rival St George bank are included.

So far the big four banks have reported a total cash profit of $25.2 billion for the 2012 financial year, with Australia and New Zealand Banking Group (ASX: ANZ) recording $6 billion, Commonwealth Bank of Australia (ASX: CBA) reporting $7.1 billion and National Australia Bank (ASX: NAB) a comparatively dismal $5.4 billion. NAB’s profits were dragged down by bad debts in the UK, and its actual reported net profit was just $4 billion.

The problem for the banks is the future. Weak credit growth is like to blunt the banks’ revenue growth, after two years of double-digit growth. Each of the banks’ executives have warned that domestic economic uncertainty is continuing and shows no signs of ending any time soon. Mortgage growth is the lowest it has been since 1976, according to September RBA data.

ANZ’s chief executive Mike Smith recently warned that Australia’s economy would grow by just 2.7% in 2013, well below its long-term average. Further rate cuts could see projected growth rise, as people start borrowing again.

To offset the potentially flat growth, banks are likely to focus on cutting costs, with executive wage freezes and bonuses being slashed, along with cutting employee numbers. ANZ has moved slowly into Asia, to increase its diversity and reduce its dependence on credit growth in Australia. With Asia potentially set to boom over the next 10-20 years, that may not be a bad move.

Foolish takeaway

Like many other sectors – including retail and media – banks rely on the economy growing. Further interest rate cuts may be necessary to kick-start the economy back into growth. We’ll see if the RBA cuts rates today, or reconsider its options next month.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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