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What you need to know from Westpac Banking Corp’s interim result

Westpac Banking Corp (ASX: WBC) has continued the banking sector’s incredible profit run this morning, announcing a record first-half cash profit of $3.77 billion. The result beat analyst expectations of $3.64 billion and topped last year’s result by 8%. While the cash profit is the preferred performance measure in the banking sector, net profit was also up 10.2% at $3.622 billion, while revenue climbed to $9.79 billion, up 6.8% on the prior corresponding period.

The performance was largely driven by a strong operating performance from each of the bank’s divisions including solid growth in lending, further improvements in asset quality and growing customer numbers across each of its major brands. A further fall in bad debt charges, which were down $97 million, also played their part in maximising profits. The strong half allowed the bank to increase its interim fully franked dividend by 4c or 5% to 90 cents per share.

Commenting on the result, CEO Gail Kelly said, “Our balance sheet is strong, and we have sector leading positions in capital, credit quality and in productivity. This enables us to further support customers as we tilt towards growth. Over the past six months we have provided more than $41 billion in new lending to Australian retail and business customers”.

Kelly also provided a relatively optimistic outlook for her company, pointing to recent signs of increased customer activity as well as a rise in consumer spending and housing construction.

So, why did the shares fall?

Despite the strong result, the bank’s shares fell in early trade – just like shares in Australia and New Zealand Banking Group (ASX: ANZ) did last week. Westpac, ANZ and Commonwealth Bank of Australia (ASX: CBA) have each achieved fresh all-time highs in recent weeks with the solid results already priced into the shares.

What’s more, many investors were also disappointed to not receive another special 10c dividend for the half (as the bank has done in the previous two half years), which would have weighed on the market’s reaction.

The market’s attention will now turn towards National Australia Bank Ltd (ASX: NAB), which is set to deliver its interim report on Thursday. Commonwealth Bank already released its results in February, where it reported an incredible $4.3 billion cash profit.

Foolish takeaway

Investors considering an investment in the banking sector need to look at the market’s reaction to Westpac’s release. Although the bank delivered a record profit which exceeded the market’s expectations and also provided a relatively upbeat outlook for the remainder of 2014, the shares still dropped 1.4%.

The sector is fully priced and is being supported by their bumper dividend yields. However, when interest rates inevitably rise, the appeal of those yields will decrease which will see investors heading for the exit. What’s more, when interest rates rise, so will bad debts which will put pressure on their overall earnings.

By no means am I suggesting any of the banks are poorly run businesses (how could I when they are performing so strongly!) but I can safely say they are not representing good value at today’s price.

Attention bank shareholders!

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

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