Westpac hits $7.1b record profit

Westpac will sweeten its payout to shareholders by adding a special dividend worth $310 million, despite concerns dividend payments by the the big banks may be constrained by upcoming capital rules.

As it handed down record profits of $7.1 billion on Monday, the country's second-largest bank said its capital levels were well ahead of internal targets and those set by regulators, and this allowed it to pay a special dividend of 10¢ a share for the second half.

Including ordinary dividends and a special dividend from the first half, investors will receive total payments of $1.94 a share this year, an annual jump of 17 per cent. The hefty payout comes as the industry prepares for rules that will require Westpac, Commonwealth Bank, ANZ, NAB and Macquarie to hold larger amounts of capital as a buffer against losses.

The rule changes, which are set to take effect from 2016, are being developed by the banking regulator.

Westpac chief executive Gail Kelly said the bank remained "well placed" to handle regulatory changes.

Westpac has the highest tier1 capital ratio among the big four banks at 9.1 per cent, compared with its own target rate of 8 per cent to 8.5 per cent.

The upcoming capital rules are part of a global push to address the "moral hazard" created by banks that are deemed too big to fail.

The Australian Prudential Regulation Authority is finalising secret discussions with bankers over the regime, but Mrs Kelly noted that in Canada, which has a similar market to Australia, the changes were being phased in over three years from 2016.

"There are some uncertainties, but we remain confident that we are very well placed with all of those," she said.

Westpac's full-year result was underpinned by its flagship Australian Financial Services division, where profits jumped 12 per cent to $4.48 billion, helped by wider net interest margins.

In recent years Westpac has put a high priority on enhancing its balance sheet strength by building up large amounts of capital, some of which it used to fund the $1.45 billion to buy Lloyds Banking Group's Australian assets last month.

Despite the prospect of tougher capital rules, analysts believe it has the strength to pay more special dividends in the future.

Macquarie analyst Mike Wiblin said Westpac's strong capital position compared with its rivals and excess franking credits suggested it may be able to pay more special dividends in the next two years.

Westpac was the best placed for dealing with any higher capital requirements from APRA, he said.

"I think they are the best positioned, so if anyone's going to have a problem it's not going to be Westpac," he said.

With big bank dividends growing by close to 10 per cent this year, investors have flocked to the sector in search of yield.

Westpac's 10¢ special dividend and a final dividend of 98¢ will be paid on December 19. Both will be fully franked.