In an environment where earnings growth is muted, a more proactive approach to enhancing income makes sense in our view, particularly if this can be achieved via high yielding fully franked dividends.

To this end, for clients that have elected the “Income” Australian equity option we have bought Westpac, with the purchase funded via the sale of Commonwealth Bank which traded ex-dividend last month and continues to be valued at a premium relative to peers despite possibly needing to raise more capital.

The two banks are broadly exposed to the same macro factors with Westpac offering:

• a relatively low risk business mix;
• the potential for further home loan repricing;
• an efficiency program to help offset margin headwinds;
• a wealth management business well positioned to leverage from a growing need for insurance & investment advice ;
• a capital position that ranks amongst the best globally

As for the broader sector it is exposed to increased competition for new loans and higher funding costs that are pressuring net interest margins, an increase in bad debts and capital requirements under Basel IV that are more onerous than expected. If these risks result in a large profit decline then dividends may be cut given the elevated payout ratio.

If you have any queries, please contact your Elston adviser.