Some of the most widely anticipated company reports occurred over the past week, with three of the “Big Four” Australian banks reporting their full year results. ANZ, National Australia Bank and Westpac reported results that were soft across most key metrics with cash earnings declining by 2% on average. Source: Company reports This is not surprising given the multiple headwinds the sector has faced over the past 18 months, such as: Weaker lending growth due to a historically soft Australian housing market, The Royal Commission into banking misconduct with the subsequent fallout resulting in billions of dollars of remediation to customers coupled increased compliance costs, Falling net interest margins (the gap between what the earn on their lending and what they pay to depositors) as a result of the Reserve Bank of Australia cutting the official cash rate 3 times in 5 months, Intense competition from smaller new entrants into the Australian housing market These headwinds have not abated and as a result the outlook statements were quite conservative, particularly from ANZ and Westpac. ANZ’s CEO summed this up by stating that “record low interest rates and intense competition will continue to impact profitability”. This has seen analysts (and the market) reduce their estimates of what these companies can earn over the next few years quite dramatically: Source: FactSet Another challenge the industry faces is the Governments increasing focus on the poor mortgage rates paid by existing customers compared to the new. On average, a customer taking out a new mortgage receives a rate around 0.5% lower than existing customers. To put this in perspective, the average mortgage in Australia in March-18 was $388. This 0.5% discrepancy results in an additional $1,941 payment per year – over the life of a loan these payments stack up. Banks are coming under pressure to better serve their loyal customers by offering them better rates without them having to go through the arduous refinancing process. In the United Kingdom this issue has received a lot of attention and front-book discounts (the lower rate new mortgage customers receive versus existing customers) have been tightening over the last five years. Interestingly there is a shining light amongst these dreary reports, and that was the performance of each banks New Zealand division. Westpac reported 4.1% growth in operating profit while NAB reported 5.1% growth. ANZ reported a 4.1% decline but this was better than the 10% decline reported by their Australian consumer division. There is another potential tailwind you may be hearing about which is a recovering housing market. As can be seen above and below all markets (even Perth!) have bounced off their lows with Sydney and Melbourne up a solid 6% each. Source: CoreLogic Data The banks do have their issues, however they remain interesting given the reasonably high dividend yield they pay, particularly when you compare this to what you can actually get depositing in the bank! The key question is now of course, are these dividends sustainable given the headwinds they’re facing?