Aussie bank earnings come back to earth after record run

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ANZ Banking Group will post its slowest annual earnings growth since the global financial crisis Thursday, underscoring the challenges Australia's major banks face from tighter capital rules even as another year of record profits beckons.

Lending growth at Australia's major banks is easing as the broader economy cools following the end of a mining investment boom. Bad debt charges are set to rise and regulators are demanding more cash be set aside against loan books.

But with bank shares about 20 percent off their 2015 peaks, investors are seeing value, attracted by dividend yields of over 5 percent compared with an official cash rate of 2.0 percent.

"It is better to invest in banks than having that money in cash," said Nicholas Forsyth, director at stock trading firm Market Matters which owns ANZ shares.

"They've all raised capital, and if you look at the dividend yields there is a disparity to the cash rate. Banks still have the capacity to return to shareholders."

Each of Australia's "Big Four" lenders, including National Australia Bank, Commonwealth Bank of Australia and Westpac, have also increased their mortgage rates to protect profits and cover the costs of tougher capital requirments.

The four have together raised over A$20 billion ($14.51 billion) since May.

No.1 lender NAB, which kicks off bank earnings on Wednesday, is expected to top rivals with a record cash profit of A$6.3 billion for the year-ended Sept. 30.

Fourth-ranked ANZ is also on track for a sixth straight year of record profits, but earnings growth will skid to 3 percent from an average annual pace of 14.4 percent in the last five years, according to mean estimates from six analysts.

Australian banks' return on equity, at 16.5 percent, is among the best in the developed world, thanks mainly to their massive mortgage books. That compares with 9.6 percent for U.S. banks and 2.4 percent for UK lenders.

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On Wednesday, investors will look for NAB's progress in exiting its British business as well as evidence of an improvement in growth in the business bank.

NAB has long trailed rivals on earnings growth and shareholder returns, but is likely to benefit from CEO Andrew Thorburn's strategy of focusing more on the lucrative home market.

On Thursday, investors will watch for ANZ's strategy in Asia, after outgoing CEO Mike Smith announced plans to exit non-core operations to improve returns.

No.3 lender Westpac pre-released results earlier this month, announcing a record profit of A$7.8 billion for the year, up 3 percent from a year ago. It will disclose detailed numbers on Nov. 2.

CBA, which follows a June-ending calendar year, posted record profit of A$9.1 billion in August.