May 6 A golden era of record profits and lush dividends is coming to an end for Australia’s major banks, with disappointing results this week revealing a new normal of more modest earnings growth due to tougher capital requirements and a sluggish economy.

Having doubled annual profits over the past five years, Australia’s banks are now set to post low single-digit growth in 2015, four fund managers with bank stocks said. Net interest margins, a core measure of profitability, will hit unprecedented lows, they added.

Bad debts are likely to rise after plunging commodity prices killed a mining investment boom, leaving the rest of the economy struggling despite record low interest rates. Expectations of more stringent minimum capital requirements are already clipping dividend yields.

“We recognise how important dividends are for our investor base. At the same time, the board has to take into account what’s the appropriate capital for the company given what we understand about the regulatory environment and risks that we are facing,” Westpac Banking Corp Chief Executive Brian Hartzer said on Monday.

“One of the challenges … is to work out what our long-term position is going to be. Most of those relate to capital, some of them relate to liquidity.”

Westpac and Australia and New Zealand Banking Group announced lower-than-expected dividends, and Commonwealth Bank warned of higher regulatory costs in one of the most downbeat reporting weeks for Australian lenders in years.

Banking shares slumped to multi-week lows after Westpac and CBA missed earnings estimates. The “Big Four” banks have underperformed the 6 percent growth in broader S&P/ASX 200 index so far this year.

Westpac’s results were followed by a ratings downgrade by Morgan Stanley, and Deutsche Bank and Bell Potter slashed their price targets. Deutsche and Jefferies also cut ANZ’s price targets, even though the most Asia-exposed of Australia’s lenders posted better-than-expected first-half profits.

Australian banks are among the most expensive in the world, with forward price-to-earnings ratios at 13.6 times compared with a global average of 8.9.

HOME LOAN PRESSURES

Banks chiefs are now battening down the hatches by slowing dividend growth, bolstering capital and selling low-returning businesses.

Westpac – Australia’s No. 2 lender by market value – announced a A$2 billion ($1.59 billion) fund raising through its dividend reinvestment plan. Third-ranked ANZ put its car and equipment finance business on the market.

National Australia Bank, which is set to post first-half earnings on Thursday, is looking to exit its struggling UK business. The bank may also sell its Australian life insurance unit to boost earnings and return on capital, sources have told Reuters.

The banks are also slowing down the most profitable part of their business – home lending.

Frothiness in the property market, particularly in the two biggest cities of Sydney and Melbourne, has triggered government intervention to crack down on illegal foreign investment and rein in lending to speculators.

Last December, a government-backed review called for stronger capital levels for the major banks, including lifting so-called risk weights on mortgages.

There’s little sense of panic, though. Romano Sala Tenna, a fund manager at Perth-based Katana Capital, says the time is right to buy bank shares.

“Banks are priced to perfection. At some point the whole banking sector will have its ‘iron ore’ moment. But we’re not there yet,” he said, referring to the commodities price crash. ($1 = 1.2550 Australian dollars) (Editing by Stephen Coates)

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