Banks are back as dividends rebound

The bank bonanza is officially back, with profits and dividends bouncing back strongly after the COVID-19 pandemic.

Westpac (ASX: WBC) showed the way with a better-than-expected half-year cash profit which was up 256% from last year’s gloom to $3.5 billion, with the dividend lifted to 58c.

More importantly, Westpac chief executive Peter King also outlined a $2 billion cut in Westpac’s cost base over the next three years, with digital transformation playing a big part in slashing the number of expensive bank branches needed.

For the same half last year, Westpac included an impairment charge of $2.2 billion but for this result the bottom line was boosted by $372 million from impairments being unwound.

Digital transformation will slash bank costs

If there is one thing that the COVID-19 pandemic has taught a lot of businesses, it is the importance of accelerating the digital side of their business as customer acceptance grows rapidly by necessity.

While ANZ and NAB were yet to report when this story was written, it is likely that the strong bounce back in bank profitability and dividend payments will be a general theme as the large provisions that were made for bad loans in the depths of the crisis a year ago turn out to be unnecessary.

ANZ Bank (ASX: ANZ) is tipped to more than double its payout from last year’s reduced level, to 63c when it reports on Wednesday and NAB (ASX: NAB) is tipped to raise its interim payment from 30c to 56c in its result on Thursday.

That means a large recovery in bank dividends, although still not back to pre-pandemic levels.

Investment bank Macquarie Group (ASX: MQG) is also expected to shoot out the lights with its full year results on Friday.

Rapid change from grim outlook

It is all an incredibly different scenario than the one facing bank share investors a year ago, when home loans were being frozen, a 20% cut in property values was being widely forecast, unemployment was jumping higher and dividends were being slashed after being capped by regulators.

A shorthand way of seeing the impact on the big banks at a glance is the Betashares Australian financials sector ETF (ASX: QFN), which has gone on an incredible roller-coaster ride.

Before the worst of the crisis last February, it was trading as high as $11.66 but quickly plummeted to just $7.15 at the end of March last year.

A rapid fall of 38% bounces back in just a year

It turns out that the 38% crunch in just a little over a month was a perfect buying opportunity, although it would have appeared incredibly brave at the time when pessimism and uncertainty were everywhere.

In the past year, QFN has recovered almost all of that lost ground, trading at $11.53 on Monday.

That is an unusually fast recovery and reflects how the outlook for the big banks has changed and how supportive to their valuations higher dividends will be.

It is possible things could get even better as the results from the other banks roll in.

Westpac’s profit recovery and dividend was significantly better than analysts had expected with the housing boom, rising employment, strong capital levels and unnecessary bad loan provisions all contributing to the renaissance.