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Banks’ profits will be difficult to repeat

Australia’s banks have defied a subdued global environment over the last 12 months, with analysts expecting that our key financials will deliver a record combined profit of $27 billion for the year – compared to the $25.2 billion recorded last year.

Commonwealth Bank’s (ASX: CBA) and Bank of Queensland’s (ASX: BOQ) results have reflected the benefits that have been realised from a low interest rate environment and slowly improving business and consumer confidence. Commonwealth announced a record annual cash profit of $7.8 billion in August and also raised its final dividend to $2 per share. More recently, Bank of Queensland increased its cash earnings after tax to $250.9 million, compared to just $30.6 million in the previous year.

The market has now diverted its attention towards the up-and-coming results of ANZ (ASX: ANZ), NAB (ASX: NAB) and Westpac (ASX: WBC) which, according to estimates, will deliver profits of $6.44 billion, $5.85 billion and $7.05 billion, respectively. Macquarie Bank (ASX: MQG) is also expected to announce $500 million profit.

Where to now?

Although Australia’s banks have been amongst the most profitable in the world over the last 12 months, analysts are anticipating that the ‘roaring growth rate’ is going to be difficult to repeat. Demand for loans has remained soft with many businesses and consumers preferring to take advantage of the low interest rates to pay off existing debts, as opposed to borrowing to fund growth.

As such, competition has been ramped up between the banks with each looking for growth opportunities elsewhere. Westpac, for instance, bought Lloyds Banking Group’s Australian assets for $1.45 billion whilst ANZ is looking to expand throughout Asia.

Whilst banks’ earnings should remain strong, the rate at which they grow will likely be slower. Jonathon Mott, an analyst from UBS, believes that they could deliver “just” 4% earnings per share compound annual growth for the next three years.

Foolish takeaway

Shares in the banks have rallied hard over the last 15 months or so as investors have sought out high-dividend yields. Given Mott’s estimate for earnings per share growth however, the shares have become overpriced and remain unlikely to deliver market-beating returns in the coming years. As such, you may be better served looking for other investment opportunities.

For instance, you could discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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