With three of Australia's major banks set to unveil their first-half earnings figures this week, investors and analysts alike will be sceptically analysing the results and looking for reasons to sell the stocks down even further – and they may have just found their first motive.
Indeed, the results posted this week could be a defining factor as to where the banks' shares — and the ASX as a whole — will go from here. After a sharp rise between January and March, each of the Big Four have retreated more recently upon rising concerns that their shares have become overpriced in regards to their future growth potential.
Those concerns are likely to have been exacerbated this morning after Westpac Banking Corp (ASX: WBC) unveiled an unspectacular first-half result, which came in well below analysts' expectations. As highlighted by the Fairfax press, analysts had been expecting a cash profit just shy of $3.9 billion and an interim dividend of 94 cents, but the bank reported a profit of just $3.78 billion (unchanged from last year) and a dividend of 93 cents. The stock plummeted 4.5% as a result early in the session.
The results will almost certainly cast a cloud of doubt over Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB), which will both post their half-year results this week, as well as Commonwealth Bank of Australia (ASX: CBA), which will report its third-quarter results on Wednesday.
Is this the end of the Big Four rally?
Investors have piled into the Big Banks' shares over the last three years in search of 'safety' and high-yield dividends, but recent developments suggest both of those benefits may be on the way out.
First of all, Westpac recently warned investors that the banks' dividend payout ratios had likely peaked, citing the need to have sufficient capital to support their future activities. This morning, the bank increased its interim dividend by just 1 cent on the half to 93 cents, which will no doubt concern investors who have relied on the bank's generous dividends in an otherwise low interest rate environment.
There are also a number of macroeconomic forces which could limit the banks' future profit growth which would almost certainly deem their current share prices unsustainable (hence the recent selloff). Economy-wide credit growth could become compromised should the banking regulator enforce tougher capital rules sooner than expected, while it is also looking likely that each of the Big Four will be required to hold more capital in reserve which would restrict their returns on equity.
Although profits remain at a record high (with expectations the Big Four's first-half profit will exceed $15 billion, according to Fairfax) Westpac's results today are certainly indicative that the good times could be nearing an end. At their current prices, investors would be well advised to avoid the bank stocks altogether, although that does raise questions as to what will happen to the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) should the banks fall too far…
