ANZ and Westpac half-year profit results reflect the strong balance sheets of Australian banks.

Unquestionably strong balance sheets

Both ANZ and Westpac have performed strongly for shareholders in the half-year reporting period to March 2024 and have maintained high capital adequacy ratios that sit well above their international peers.

ANZ and Westpac reported a statutory net profit after tax of $1,038 million and $3,342 million respectively for the six months to 31 March 2024. ANZ generated earnings per share of $1.18 and Westpac’s earnings per share came in at 95.6 cents. ANZ achieved a net interest margin of 1.63 percent for the March 2024 half-year, compared to Westpac which earned a higher net interest margin of 1.89 percent. Both banks earned slightly stronger net interest margins in the prior half-year to 30 September 2023 with ANZ at 1.65 percent and Westpac at 1.94 percent.

Both banks have exceptionally sound balance sheets, as do all four major Australian banks. Bank capital is measured on a risk-weighted basis under an international regulatory framework that sets minimum ratios for capital adequacy and liquidity. Known as the Common Equity Tier 1 ratio (CET1), ANZ currently has a CET1 capital ratio of 13.5 percent at March 2024 and Westpac a CET1 ratio of 12.55 percent.

However, Australia’s prudential regulator, the Australian Prudential Regulation Authority (APRA) has adopted a far more stringent capital adequacy framework for Australian banks compared to comparable Basel 3.1 Prudential Standards that apply in other banking jurisdictions throughout the developed world. For example, APRA applies higher risk weight multipliers for mortgage loans that are interest-only or for residential investment purposes, compared to owner-occupied houses, and requires a full deduction against CET1 capital for investments in insurance and banking associates. This means that on an Internationally Comparable basis, ANZ has a CET1 capital ratio of 19.6 percent and Westpac a CET1 capital ratio of 18.6 percent. These are ‘best-in-class’ capital adequacy measures and position Australian banks as arguably the most prudentially sound in the world.

Share buy-backs and dependable dividends 

In addition to paying dependable dividends, including special dividends, Australian banks display a strong shareholder return bias by returning surplus capital to shareholders. This is exemplified by ANZ’s $2 billion on-market share buy-back announced this week and Westpac’s decision to extend its current $1.5 billion on-market share buy-back program by $1 billion to $2.5 billion. Share buy-backs have an enduring benefit to shareholders because buy-backs reduce the share count, and effectively over time, grow earnings per share at a faster rate than earnings.

Both Westpac and ANZ are also generous with their shareholder dividend payout ratio policy. This is reflected in Westpac’s 15 cents special dividend to accompany the bank’s 75 cents interim ordinary dividend for the March 2024 half-year, taking Westpac’s dividend payout ratio to 74 percent of earnings. This compares to ANZ’s dividend payout ratio of 70 percent for the March half-year, based on the bank’s interim ordinary dividend of 75 cents per share. Having a strong balance sheet and a strong capital adequacy ratio support a high dividend payout ratio.

Steady economic outlook to support future profit growth 

Both ANZ and Westpac are well positioned to take advantage of Australia’s favourable medium-term economic outlook. ANZ has recently provided its assessment of Australia’s pipeline of major infrastructure projects ($500 million+) requiring bank funding and has estimated this total amount at more than $100 billion by 2026. The projects include roads, rail, electricity, oil and gas, hospitals, and communication facilities.

This is the type of growth environment in which banks prosper in that bank profits are strongest during periods of economic prosperity. The Australian economy is resilient and most economic forecasts point to higher GDP growth from 2025. While geo-political risks are elevated compared to the previous decade of relatively benign global instability, investment markets are forward looking, and so the current international uncertainty is already reflected in today’s asset prices and market conditions. This implies that investors holding Australian bank shares with a medium to long-term perspective are likely to achieve positive returns.