Aussie banks' appeal dims despite no subprime

By Denny Thomas

SYDNEY, Sept 20 (Reuters) - Shares in Australia's banks, such as ANZ (ANZ.AX) and CBA (CBA.AX), often perceived as safe and defensive, have come under pressure in the wake of global credit turmoil despite having no direct exposure to risky subprime mortgages.

Hefty dividend yields and steady earnings growth have lured investors to the sector, in a positive backdrop of 16 years of Australian economic expansion and three-decade low unemployment.

Analysts warn growth could slow though, potentially threatening dividend payouts, if funding costs stay high for long.

"For many many years, as a banking analyst, all you have done every year is upgrade the EPS (earnings per share) forecasts for banks," JP Morgan analyst Brian Johnson said.

"Profits will grow, but the growth rate in earnings will actually slow," he said, adding that more recently he has started to downgrade earnings.

Banks account for more than a fifth of Australia's benchmark share index .AXJO and a downturn in the sector would undermine the strength of the broader market.

The upcoming earnings season will reveal the true extent of the damage done, but banks are already bracing for higher funding costs to cut earnings if the global credit squeeze goes on. Over the past month, the eight-stock Australian banking sub-index .AXBAJ has dropped 1.1 percent, in contrast to a 1.7 percent rise in the broader market.