Suddenly, boring banks are exciting

As the '90s became the noughties the glowing white Apple became a sine qua non for the cool crowd in cafes and workplaces as Steve Jobs announced a series of devastatingly clever devices.

In the sharemarket, Apple was super-cool, too. It cost less than $US7 to buy an Apple Inc share a decade ago. Even with Apple's shares down from a high of $US702 in mid-September last year to $US405, the 10-year return is almost 6000 per cent.

Here in Australia, however, investors who bought the boring old banks have been the cool ones more recently. It's not an apples-with-apples comparison, but as Westpac, NAB and ANZ prepare to announce March-half profits that will total more than $9 billion, Australian bank shareholders are pretty happy.

Apple's share price return over a decade is one for the ages, but until last year when the group declared a dividend that it has just raised along with plans to boost share buybacks by $US50 billion, the share price gain was all investors got. Australia's banks, on the other hand, are big dividend payers: it is one of the main reasons boring, yield-hungry investors like them.

Apple's 10-year share price gain of about 5750 per cent dwarfs the 66 per cent gain posted by the banks in the S&P/ASX 200 share index over the same period, but Apple's all-in return including dividends is only 1.5 per cent higher.

The ASX 200 banks' 10-year total return - that is, their share price gain plus dividends - is 268 per cent, four times their share price gain.

Over five years, Apple's total return is 139 per cent. Australian bank shares rose by only 38 per cent over the period (they were hammered by the global crisis) but their total return including dividends is 113 per cent.

Then it gets interesting. Over three years, Apple returned 55 per cent of share price gain, and a total return of 57.2 per cent. The Australian banks delivered a 19 per cent share price gain and a 56 per cent total gain, in line with Apple.

Apple's shares are up 15.6 per cent over two years, and by 17.3 per cent including dividends. The Australian banks shares are up 27 per cent, and by 54 per cent including dividends. In the past year Apple's shares are down 29 per cent, or 28 per cent on a total return basis. ASX 200 bank shares are up by 37 per cent, and total return including dividends is 50 per cent.

That's pretty cool performance in this stolid post-crisis environment, and the profits that three of the big four banks announce over the next two weeks shouldn't derail it.

ANZ reports on its March half-year next Tuesday, and is expected to post 7 per cent higher cash earnings of about $3.1 billion. Westpac reports the following Friday, and is expected to boost first-half earnings by the same percentage to $3.4 billion. NAB reports on May 9, and is being tipped to post earnings of $2.89 billion, 2 per cent above its earnings in the March half last year.

Wholesale funding costs should begin to ease from here on, as the funding cost blowout that accompanied the global crisis rolls off the banks' balance sheets. This will improve their profit margins.

How much of the gain is retained and how much is passed on in lower lending rates is uncertain, but it's safe to assume that some of it is going to be "banked." The banks may report an uptick in problem personal loans in the half, but that's a common post-Christmas spending-binge occurrence. They will also observe that lending demand is still weak but, as always, the question will be: compared with what?

Housing credit was growing at an annual rate of 22 per cent in 2004, and did not fall below 10 per cent until the middle of 2008. It was running at 4.4 per cent in February. Business lending growth peaked at an annual rate of 24 per cent at the end of 2007. In February it was running at 3.9 per cent.

Loan growth is a revenue proxy for the banks: lending is what they do. It will not return to double-digit levels, and may stay around current levels for a year or more. That means that revenue growth will be subdued - but it's not the end of the world.

Coles has just reported third-quarter sales growth of 6.4 per cent and been lauded for it, for example. Woolworths increased its third-quarter sales by 2.5 per cent, and Brambles shares are close to their year high after it said this week that third-quarter sales were 4 per cent higher.

There are plenty of groups that get by on single-digit revenue growth. They do so by running their businesses efficiently, and extracting productivity gains to magnify the top-line result.

The banks are in the same place now, and will be for years. But it's a good enough groove to enable them continue to increase dividends that are currently yielding more than twice the Commonwealth 10-year bond. There have been worse places to be than Australia's banks in the past few years: just ask an Apple shareholder.

mmaiden@fairfaxmedia.com.au