Westpac surprises with bumper payout

Westpac has continued the run of dizzying profits from the big four banks by reporting a strong 10 per cent jump in first-half cash earnings to a record $3.525 billion - allowing it to boost investor coffers with a surprise special dividend.

The earnings result exceeded analyst expectations of $3.41 billion as the bank grew its profits across all its core divisions.

The bank declared a fully franked 86¢ interim dividend, but the kicker was a further fully franked special dividend of 10¢ a share, rewarding investors who had backed Westpac replicating the fat profits and high yields of the other major banks - including ANZ, which reported a similarly strong result this week.

But despite the strength of the result, chief executive Gail Kelly insisted the banking industry was operating in a "tough" environment, and that there were "a number of breaks" in the economy, with consumers cautious, business confidence lacklustre and lending growth subdued.

Mrs Kelly said while wholesale funding costs - which were driven up by the credit crunch during the financial crisis - had eased, the competition in the chase for customer deposits had seen banks' overall funding costs continue to rise.

Persistently high overall funding costs is the reason maintained by all the big four banks for not passing on all of the RBA's rate cuts in the recent rate-cutting cycle, a particularly sore point for mortgage-holders - and Treasurer Wayne Swan.

"From an overall point of view, funding costs continue to go up," Mrs Kelly told reporters in Sydney on Friday. "Less than they used to before, but they haven't started to decline."

Westpac reported a growth in its lending of $15 billion, or 3 per cent in the past six months, primarily driven by home loans, while customer deposits increased $40 billion to $360 billion, up 12 per cent.

Shares in Westpac soared to a record high of $34.79 in early trade on Friday, before being pegged back to $33.55, down 1 per cent, by the day's end as investors took profits.

Analysts also pointed to weak spots in an otherwise impressive result.

Mike Wiblin, an analyst at Macquarie Securities, said the result was of a lower quality when compared to the previous half, when there was stronger deposit and margins growth.

"They had everything going for them [in the previous half]," he said. "This result, deposit growth wasn't as strong."

He said investors would look at the trajectory of Westpac's future earnings growth and that the risk was to the downside, rather than up.

"People are looking at it and saying 'There's probably a bit more to go but I might as well get out at this point because I've had a good run'."

Mrs Kelly was keen to emphasise that unlike ANZ, Westpac's special dividend was not necessarily an indication of a long-term lift in its dividend payout policy.

"We followed our normal pattern, which is actually a 2¢ increase in our ordinary dividend, which really maintains our payout ratio," Mrs Kelly said. "These [the ordinary and special dividends] are not things that you add together."

Mr Wiblin said the special dividend was smaller than it could have been, which indicated Westpac was cautious about its outlook.

"Things are still a bit uncertain on the capital front," he said, adding Westpac had the room to issue further special dividends if circumstances suited.