Which bank stands out from the crowd for the future?

Source: Australian Broadcasting Corporation

With the big four banks having recently reported results, it might be timely to review their results and their outlook for the future.

Cash earnings

Cash earnings are essentially the underlying net profit for the banks and give a better indication of their ‘true’ business performance.

Bank Amount Change
Australia and New Zealand Banking Group (ASX: ANZ) $3.5 billion Down 4%
Commonwealth Bank of Australia (ASX: CBA) $4.8 billion Up 4%
National Australia Bank Ltd (ASX: NAB) $3.3 billion Up 6.5%
Westpac Banking Corp (ASX: WBC) $3.9 billion Up 3%

Source: company reports

ANZ’s cash profit before provisions was up 5%, so on that basis, all four of the banks posted decent results. However, it’s not until we take a look at the next table that we see the real ‘true’ results that matter to shareholders.

Cash earnings per share

Bank Amount Change
Australia and New Zealand Banking Group 121 cents Down 8.3%
Commonwealth Bank 284.4 cents Up 0.7%
National Australia Bank  125.7 cents Down 1.6%
Westpac Banking Corp 118.2 cents Down 6%

Source: company reports

ANZ, NAB and Westpac’s earnings per share (EPS) were all down due mostly to huge capital raisings during the year, and CBA only managed to see a small increase in EPS. Share prices tend to follow earnings per share, so the banks will want to reverse this trend if they want to see their share prices higher.

Operating income

Bank Amount Change
Australia and New Zealand Banking Group $10.3 billion Flat
Commonwealth Bank $12.4 billion Up 6%
National Australia Bank $8.9 billion Up 3%
Westpac Banking Corp $10.6 billion Up 6%

Source: Company reports

Like Cash earnings, operating income results aren’t that bad.

Return on Equity

Bank Ratio Change
Australia and New Zealand Banking Group 12.2% Down 2.3%
Commonwealth Bank 17.2% Down 1.4%
National Australia Bank 14.1% Down 1.7%
Westpac Banking Corp 14.2% Down 1.7%

Source: Company reports

All of the banks’ return on equity (ROE) ratios have dropped, primarily due to a strong rise in underlying equity (and number of shares).

Dividend and payout ratio

Bank Amount Payout ratio Dividend change
Australia and New Zealand Banking Group 80 cents 67% Down 7%
Commonwealth Bank $1.98 70.8% Up 1.4%
National Australia Bank  99 cents 78.8% Up 1.3%
Westpac Banking Corp 94 cents 80.3% Down 1%

Source: company reports

NAB’s payout ratio increased by 1.3% to 78.8%. Westpac’s payout ratio of over 80% is much higher than historically (76.8% last year) and both NAB and Westpac are unlikely to be able to sustain such high rates for long.

ANZ cut its pro forma dividend yield to 67%, but intends to consolidate in its long-term range of between 60 and 65%. That suggests more cuts to dividends are coming for ANZ, NAB and Westpac.

By comparison, CBA’s payout ratio is at 70.8%, and while it also could be cut, CBA appears under less pressure to do so than the other three banks.

Foolish takeaway

The results clearly show the impact on the banks of being forced to hold more capital and their subsequent capital raisings. Add in the outlook for rising bad debt provisions, lower margins, low single-digit or negative earnings growth, and higher capital requirements suggest now is not the time to be buying bank shares.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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