Australia’s “Four Pillars”–the country’s four largest banks–have been widely lauded for their stability.

Commonwealth Bank of Australia (ASX: CBA, OTC: CMWAY, CBAUF), the largest with a market cap of AUD108.16 billion, Westpac Banking Corp (ASX: WBC, NYSE: WBK), the second-largest at AUD89.82 billion, Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANZBY, ANEWF), No. 3 at AUD76.34 billion, and National Australia Bank Ltd (ASX: NAB, OTC: NABZY, NAUBF), No. 4 at AUD68.84 billion operate under a de facto prohibition of mergers among them, an official government policy adopted in 1990  to maintain a competitive local market.

But, according to the International Monetary Fund (IMF), it also prevented domestic banks from increasing in size and led to the creation of “national champions” that could compete with major global financial institutions.

The policy, along with a proudly “intrusive” regulator, the Australian Prudential Regulation Authority, may also have prevented Australia’s banks from establishing too much exposure to risks in international banking leading up the Great Financial Crisis.

In the aftermath of the GFC Australia’s Four Pillars implemented Basel III financial standards in 2013, well ahead of schedule.

According to the Bloomberg Riskless Return Ranking, Australian banks posted the best risk-adjusted returns among global peers over the past 10 years, attracting investors with rising earnings and the highest dividend yields of the world’s biggest lenders.

Commonwealth Bank of Australia posted the highest returns when adjusted for price swings among the largest companies in the MSCI World Bank Index with a market capitalization of more than USD5 billion. Westpac and ANZ ranked fourth and seventh, respectively.

Earnings for Australia’s banks have grown steadily amid the broader economy’s uninterrupted expansion since 1991. Australia’s two decades-plus without a recession is a record unmatched by any other developed economy.

During this time the Reserve Bank of Australia (RBA) has kept its benchmark interest rate among the highest in the developed world to stem inflation.

Australian banks, like the rest of the global financial industry, suffered during the 2007 to 2009 financial crisis. After reaching a record in November 2007, Commonwealth Bank shares tumbled 61 percent in 14 months. But, outpacing their peers in the developed world, Commonwealth Bank, ANZ and Westpac all reached records within the first five months of 2013.

Record profits, higher dividend payout ratios and low bad debts fueled a strong rally in Australian bank shares through April.

The type of growth that attracted yield-seeking capital from abroad is likely to slow due to an aging population and slowing mortgage growth.

But earnings risk is relatively modest, dividends are safe and yields remain attractive.

The S&P/Australian Securities Exchange 200 Banks Index fell 13 percent in May, the biggest decline in a year, as the Australian dollar slid by 7.7 percent against the US dollar, reducing the appeal of Sydney-listed shares for overseas investors.

But the sector index is up 252 percent in the 10 years through May 31, 2013, including dividends, beating a 123 percent total return by the MSCI World Index and a 109 percent gain by the S&P 500 Index.

Net dividend yields (which exclude the impact of franking credits, which apply only to Australian investors) of 6.5 percent for Westpac and National Australia Bank, 5.7 percent for ANZ and 5.5 percent for Commonwealth Bank dwarf the  and the 3.7 percent average yield on the MSCI World Bank Index.

Results recently reported by the Four Pillars continue to reflect an economy that’s running below growth rates established during the middle stages of what’s now a two-decades-long streak without a recession.

At the same time, however, the Four Pillars are improving their funding mixes, strengthening their balance sheets and continuing to grow dividends for shareholders.

From April 30 through June 12 ANZ, Commonwealth Bank, National Australia and Westpac declined by an average of 16 percent. This selloff has brought their forward price-to-earnings ratios back into line with global peers.

By the Numbers

Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY), also an original member of the AE Portfolio, beat analysts’ expectations with its fiscal 2013 first-half (ended March 31, 2013) numbers on cost savings at home and the continuing success of its endeavors in Asia.

The latter factor–ANZ’s push beyond Australia and New Zealand–is the major factor that separated it from the other three major Australian banks when we made our initial Portfolio selections in September 2011.

ANZ also announced a 10.6 percent interim dividend increase, to AUD0.73 per share from AUD0.66 a year ago. The magnitude of the increase suggests ANZ is responding to the market’s hunger for yield.

ANZ now appears to be targeting a payout ratio in upper part of a 65 percent to 70 percent range, with the former 45 percent/55 percent first-half/second-half skew in its dividend rate replaced by a policy that more closely aligns dividend growth with earnings growth each period.

ANZ hit an all-time closing high of AUD31.84 on the ASX the day of its earnings announcement but sold off to as low as AUD26.55 as of June 12.

Reports that Federal Reserve Chairman Ben Bernanke will offer public assurances that the US central bank intends to keep official rates lower for longer–thus continuing an aggressive monetary stimulus program that seems to be having as much if not more impact abroad as it is on the domestic economy–drove the share price to a weekly close of AUD27.82 on June 14.

The stock has actually underperformed its peer group since ANZ announced fiscal 2012 numbers last October, as the bank’s relatively high institutional exposure as well as its New Zealand business exerted a drag on margins.

The institutional exposure and New Zealand still dragged on margins in the first half of 2013, but management noted that negative trend for both divisions stabilized during the second quarter. Management now forecasts a decline of one or two basis points for net interest margin for the second half of fiscal 2013, but this will result from lower average rates rather than competitive pressures or because of revenue/market mix.

Net interest margin overall was down 3 basis points half over half and 10 basis points year over year to 2.25 percent but was steady at 2.67 percent, as lower wholesale funding costs were offset by competition for deposits and lower earnings due to the Reserve Bank of Australia’s recent stretch of cuts to its benchmark overnight cash rate.

ANZ’s margin trajectory–which had set it apart, negatively, from its top three competitors in recent halves due to institutional and New Zealand exposure–should be less of a headwind for the rest of fiscal 2013 and into 2014. Volume and non-net interest income growth should drive stronger revenue growth going forward.

Statutory net profit after tax for the first half of ANZ’s fiscal 2013 was up 7 percent compared to the second half of fiscal 2012 to AUD2.94 billion. Cash profit, which doesn’t include the impact of one-time items, was up 8 percent quarter over quarter and 10 percent year over year to AUD3.18 billion.

ANZ’s share of retail banking in Australia grew to 14.3 percent as of March 31, 2013, up from 14 percent at the end of the second half of fiscal 2012. And domestic profit margin grew by 3 basis points from a year earlier.

Loan growth across the portfolio was robust at an annualized rate of 6.3 percent, though Australia was relatively subdued with annualized growth of 4 percent. Growth in ANZ’s overseas markets was strong, at 12.3 percent.

After reporting a 15 percent reduction in new impaired assets management now expects full-year provisions for bad loans to be in line with fiscal 2012 levels of AUD1.258 billion.

ANZ, the leader among Australia’s Four Pillars in terms of expansion of operations into greater Asia, now earns approximately 20 percent of its revenue from operations outside Australia and New Zealand. The long-term target is 25 percent to 30 percent.

CEO Mike Smith noted ANZ’s “ability to invest over $400 million in growth initiatives during the period while also producing strong productivity outcomes across the business.” Overall expenses declined 8 percent, while the bank’s cost-to-income ratio was down to 44.7 percent, a “step change,” according to Mr. Smith.

The move to a single brand and platform in New Zealand, reaching critical mass in Asian support hubs to increase efficiency in the Australian franchise and  building Asian businesses to a point where incremental revenue exceeds incremental costs have helped ANZ cut its underlying cost-to-income ratio by 160 basis points since the end of fiscal 2012.

Management is targeting 200 basis points by fiscal 2014.

Australia & New Zealand Banking Group is a buy under USD30 on the Australian Securities Exchange (ASX) using the symbol ANZ and on the US over-the-counter (OTC) market using the symbol ANEWF.

The bank also trades as an American Depositary Receipt (ADR) on the US OTC market under the symbol ANZBY. Buy Australia & New Zealand Banking Group’s ADR, which is worth one ordinary, ASX-listed share, under USD30.

Westpac Banking Corp (ASX: WBC, NYSE: WBK) is Australia’s No. 2 bank in terms of market capitalization. It also pays the highest dividend to shareholders among the Four Pillars, with an historic payout ratio of approximately 79 percent.

Management, along with its May 3, 2013, announcement of fiscal 2013 first-half results, boosted the interim dividend by 4.9 percent to AUD0.86 per share and also declared a AUD0.10 per share special dividend.

Westpac reported cash earnings for the six months ended March 31, 2013, of AUD3.525 billion, up 10 percent compared to the first half and 4 percent versus the second half of 2012. Cash earnings per share were AUD1.14, up 8 percent year over year and 3 percent sequentially.

The payout ratio for the period based on cash earnings per share and the regular interim dividend rate of AUD0.86 per share was 75.4 percent. Including the special dividend rate of AUD0.10 the payout ratio was 84.2 percent.

Westpac’s Common equity tier 1 ratio based on Basel III ticked up by 100 basis points compared to the first half of 2012 to 8.7 percent, above management’s “preferred range” and the highest among the Four Pillars. It’s “internationally harmonized” Basel III tier 1 ratio was 11.4 percent.

This capital cushion provides a solid cushion in an environment where loan growth is as slow as it’s ever been in Australia, and it affords the bank room to buy back shares and/or to continue to grow its dividend.

Statutory net profit after tax (NPAT) was AUD3.304 billion, up 11 percent from the prior corresponding period and 10 percent from the second half of 2012.

Westpac has passed on only a portion of the Reserve Bank of Australia’s recent rate cuts to borrowers, as it attempts to preserve margins. Much of its first-half growth, as was the case for ANZ, was gotten through effective cost controls.

The bank’s expense-to-income ratio improved by 51 basis points compared to the first half of 2012 to 40.6 percent.

Customer deposits increased by AUD40 billion, or 12 percent, to AUD360 billion. Lending grew by AUD15 billion, or 3 percent, driven primarily by Australian housing loans.

Net interest margin improved by 2 basis points to 2.19 percent, as net interest income increased AUD222 million to AUD6.445 billion, with a 3 percent rise in average interest-earning assets.

Non-interest income was up AUD247 million, or 9 percent, with wealth management and insurance income rising AUD133 million, reflecting the combination of improved cross-selling and stronger markets supporting higher funds under management and funds under administration.

Trading income increased by AUD114 million due to good demand for interest-rate hedging products.

Impairment charges were lower by AUD170 million lower, principally due to improved asset quality in the mid-to-large corporate portfolio, with reduced impairment charges in Westpac Institutional Bank (WIB) and St.George Banking Group.

Asset quality improved, as “stressed exposures” as a share of total loan commitments declined by 32 basis points compared to a year ago.

Westpac’s funding mix also improved, including a further 5.8 percentage point rise in the customer deposit-to-loan ratio to 69 percent. Management reported liquid assets of AUD111 billion, sufficient to cover all short-term debt outstanding.

Management reported a cash return on equity of 16.1 percent, up 102 basis points year over year.

Westpac Banking Corp is a buy under USD30 on the Australian Securities Exchange (ASX) using the symbol WBC.

Westpac also trades as an American Depositary Receipt (ADR) on the New York Stock Exchange under the symbol WBK. Westpac Banking Corp’s ADR, which is worth five ordinary, ASX-listed shares, is a buy under USD150.

Based on the recent selloff that’s left all of the Four Pillars trading at attractive valuations and dividend yields, we’re upgrading the final two among the group to “buy” from “hold.”

Commonwealth Bank of Australia’s (ASX: CBA, OTC: CBAUF, ADR: CMWAY) results for its fiscal 2013 third quarter, which ended March 31, 2013, like recent numbers for ANZ and Westpac, continue to reflect management’s efforts to control expenses as well as modest credit growth across its business lines.

Cash earnings for quarter were approximately AUD1.9 billion. Statutory net profit was also approximately AUD1.9 billion.

Revenue growth was modest due to efforts to maintain credit quality. Net interest margin was higher in the quarter due to a combination of factors, including prior period asset re-pricing, partly offset by higher funding costs. Trading income, meanwhile, was consistent with the fiscal 2013 first-half run rate.

Liquid assets remained strong at AUD130 billion, giving Commonwealth Bank sufficient capacity to cover its short-term obligations.

Total impairment expense was AUD255 million in the quarter, or 19 basis points of total average loans.

Asset growth was funded by deposit growth in the quarter, with the deposit funding percentage increasing to 65 percent as of March 31. The average duration of the wholesale funding portfolio was extended further in the quarter to 3.8 years, providing further stability in a current environment of interest-rate instability.

Commonwealth Bank’s “internationally harmonized” common equity tier 1 ratio was 10.3 percent as of March 31, down from 10.6 percent as of Dec. 31, 2012, as continued strong organic capital generation was offset by the declaration of the 2013 interim dividend, which had a negative impact of 92 basis points.

Management raised the fiscal 2013 interim dividend by 20 percent to AUD1.64 per share in February.

Management noted that the bank’s statutory quarterly disclosures revealed that credit quality remained sound. Arrears rates in home lending were stable but seasonally higher in unsecured consumer lending.

Corporate credit quality was stable, with total impaired assets largely unchanged from December 2012 at AUD4.3 billion. And provisions for bad loans and coverage ratios remained strong.

For the half year ended Dec. 31, 2012, cash earnings were up 6 percent to AUD3.78 billion, as statutory net profit after tax (NPAT) inched up 1 percent to AUD3.661 billion compared to the first half of 2012. Revenue for the period was up 5 percent, despite subdued market conditions.

Return on equity was 18.1 percent on a cash basis.

Commonwealth Bank of Australia is now a buy under USD66 on the Australian Securities Exchange (ASX) using the symbol CBA and on the US over-the-counter (OTC) market using the symbol CBAUF.

The bank also trades as an American Depositary Receipt (ADR) on the US OTC market under the symbol CMWAY. Commonwealth Bank of Australia’s ADR, which is worth one ordinary, ASX-listed share, is a buy under USD66.

National Australia Bank Ltd (ASX: NAB, OTC: NAUBF, ADR: NAZBY) also raised its interim dividend, by 3.3 percent to AUD0.93 per share.

On a statutory basis Australia’s fourth-largest bank by market capitalization posted net profit of AUD2.52 billion for the six months ended March 31, a 22.8 percent year-over-year increase.

Cash earnings were up 3.1 percent to AUD2.92 billion, mainly due to higher earnings in personal banking and wholesale banking. Revenue increased by 1.6 percent on growth in personal banking, New Zealand banking and wholesale banking.

Net interest margin was 2.03 percent, down three basis points sequentially. Operating expenses increased by 0.6 percent, reflecting ongoing investment in the Australian franchise, partially offset by efficiency initiatives and cuts to discretionary spending.

Bad debt expenses were broadly in line with year-ago levels and AUD142 million below the second half of fiscal 2012.

National Australia raised AUD12.1 billion of term wholesale funding (including secured funding) in the first half of fiscal 2013, with the weighted average term to maturity rising to 5.0 years. The “stable funding” index was 86 percent as of March 31, 2013, in line with Sept. 30, 2012.

The bank’s Basel III common equity tier 1 ratio was 8.2 percent as if March 31, up 32 basis points from Sept. 30, providing it a comfortable buffer against its 7.5 percent target. Its “internationally harmonized” Basel III tier 1 ratio was 9.99 percent.

National Australia Bank is now a buy under USD30 on the Australia Securities Exchange (ASX) using the symbol NAB and on the US over-the-counter (OTC) market using the symbol NAUBF.

The bank also trades as an American Depositary Receipt (ADR) on the US OTC market under the symbol NABZY. National Australia Bank’s ADR, which is worth one ordinary, ASX-listed share, is a buy under USD30.