Say G'Day to This Aussie Bank

11/11/2010 10:15 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

They have banks in Australia, too—strong banks—and a stronger economy and an appreciating currency against the US dollar.

And no government constraints on raising dividends if a bank wants to signal its confidence in the future.

I’m going to use the weakness in Australian stocks over the last few days—when China sniffles, Australia’s stocks take to their sickbeds—to buy one for my Jubak’s Picks Portfolio.

On November 2, Westpac Banking (NYSE: WBK) reported earnings for the 2010 fiscal year that ended on September 30.

The company, one of Australia’s big four banks, raised its final dividend for the year to A$0.74 from an expected A$0.70 to bring its payout for the year to A$1.39 a share, a 20% increase for the fiscal year. (In the US, the stock trades as an ADR with one ADR equal to five Australian shares.)

And why not? The bank said net profit for the year rose to A$6.3 billion from A$3.4 billion in fiscal 2009. Charges for bad loans dropped to A$1.5 billion, a 55% decrease. Net interest income rose 2% from the prior fiscal year.

The only negative item was a 3% drop in revenue in the second half from the first six months of the fiscal year. Like its US counterparts, Westpac saw a big drop in bond-market trading income.  (For more on that problem and its effect on US banks, see this post.)

Australia’s banks escaped the worst of the global mortgage crisis thanks to stiffer regulation by the Australian Prudential Regulation Authority, which required banks to keep higher capital ratios and to raise Tier 1 capital ratios in 2008 and 2009 to 8% to 9% of risk-weighted assets. (For more on Australia’s stock market, click here.)

As a consequence, Australia’s big banks aren’t going to find meeting the new global Basel III rules on banking capital much of a challenge by the time they go into effect in 2015-2018 (although it now looks like Westpac will escape the toughest requirements of Basel III, because its business is concentrated in Australia and New Zealand.)

Westpac operates in Australia, New Zealand, Singapore, and Hong Kong. At home the bank’s consumer banking franchise gives Westpac a solid base of funding from customer deposits. At home and abroad, the company has used recent acquisitions to build a substantial wealth management business.

On November 2, the Reserve Bank of Australia raised interest rates for the first time in six months. The central bank raised its overnight cash rate target, the central bank’s benchmark by a quarter of a percentage point to 4.75%.

Although inflation is running at just 2.8% in the latest numbers, the flood of dollars into the country in search of higher returns has convinced the central bank that any increase in inflation could set off a rapid price spiral.

Higher interest rates in Australia have pushed the Australian dollar to parity with the US dollar and beyond. The Aussie traded at $1.0149 on Friday, November 7 before falling to $1.004 Wednesday on worries about the euro and China’s in-bank reserve requirements.

Westpac pays a projected dividend of 6.7%, according to Morningstar. (The record date for the latest dividend was November 3, so you’ve got a while to wait for income from these shares.)

I’m adding the ADR to Jubak’s Picks, with a target price of $146 a share by October 2011. (It closed below $112 Wednesday.)

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund’s portfolio here.

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