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Westpac records $7.1 billion profit, announces special dividend

Westpac  (ASX: WBC) has today announced a record annual profit for the year ending 30 September 2013 whilst also declaring a special dividend payout, appeasing shareholders’ concerns that it may have had to put it on hold due to APRA’s pending new rules.

The bank increased its cash earnings for the year by 8% to $7.1 billion, which capped off a remarkable earnings period for the big four banks following record profit announcements from ANZ (ASX: ANZ), NAB (ASX: NAB) and Commonwealth Bank (ASX: CBA). Combined, the banks delivered an annual profit of $27.3 billion, topping last year’s result of $25 billion.

An improvement in asset quality as well as a strong performance in each of the bank’s operating divisions (which each grew in revenue and earnings) drove the record result. Gail Kelly, Westpac’s CEO, said “I am very pleased with our 2013 result. It demonstrates strength, consistency, careful balancing of growth and return, and disciplined execution of our strategy.”

Dividends and capital position

Whilst the market was eager to learn Westpac’s cash earnings result however, anticipation was higher regarding the group’s dividends. Shares in the bank fell last week following APRA’s announcement that it would require Australia’s largest banks to maintain a higher capital reserve, which investors feared would impact on the bank’s ability to pay a special dividend.

Shareholders will be feeling relieved today as the bank came through with its special 10c per share dividend whilst also increasing its final dividend to 88c per share. This took the bank’s full-year payout to $1.94 a share compared to last year’s $1.66 a share (this figure includes the special dividend amounts).

The bank’s strong capital position was also reflected in its decision to purchase Lloyds Banking Group’s Australian assets for $1.45 billion after the end of the reporting period, which it was able to fund with internal reserves without having to raise further capital.

Outlook

Kelly recognises signs of improving confidence which should translate into increased lending activity. Results may have been restricted as consumers and businesses took advantage of low interest rates to pay off debts as opposed to taking out further loans, but that should change in the near future as confidence in the market continues to grow.

Kelly also said “Our businesses are all performing well, we are seeing tangible benefits from the investments we have made in our digital capabilities and distribution network, and our capital position is the strongest in the sector. This sets us up well for FY14 and should see us continue to deliver high quality, consistent returns for shareholders.”

Foolish takeaway

Despite the strong results reported by the banks, the shares in each remain overpriced compared to future potential. Whilst they could certainly continue to increase profitability or dividend payments, there are plenty of alternatives that look much more likely to deliver stronger returns in the long-run.

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

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