With many of our banks and financial stocks having posted significant gains over the last few years, it's of little surprise that many Aussie investors are beginning to question their valuations. After all, no stock price goes up forever and, after such a strong period of performance, a pullback seems like a logical next move.
However, that doesn't mean that their long-term futures are any less appealing, with a number of financial stocks having considerable potential.
With that in mind, here are three finance companies that, after a period of lacklustre share price performance, could be set to make strong gains over the medium term.
Australia and New Zealand Banking Group
With shares in Australia and New Zealand Banking Group (ASX: ANZ) having fallen by 6% in the last six months, their valuation has eased somewhat. This means that, even though ANZ has risen by an index-beating 40% in the last five years, it could be worth buying at the present time.
For example, ANZ trades on a price to earnings (P/E) ratio of just 11.8, which is considerably lower than the rating of either the ASX (14.9) or the wider banking sector, which has a P/E ratio of 13.7. This means that an upward rerating could take place, thereby pushing ANZ's shares higher.
And, with ANZ rumoured to be all set to kick-off the sale of its vehicle and equipment finance business, Esanda, it could receive a short term cash boost of around $2 billion. This could improve investor sentiment in ANZ as well as its cash flow, and help its share price to move higher this year.
QBE Insurance Group Ltd
Also making headlines regarding mergers and acquisition (M&A) activity is QBE Insurance Group Ltd (ASX: QBE), with it being in the process of selling agency businesses in North America to Alliant Insurance Services for around $366 million. This fits in with QBE's strategy of simplifying its business and disposing of non-core activities, thereby helping it to become more efficient and, ultimately, more profitable.
Unlike many of its finance sector peers, QBE's share price performance has disappointed in recent years, with it posting a total shareholder return of minus 10.2% per annum over the last five years. However, looking ahead, QBE could be a strong performer since it offers a price to earnings growth (PEG) ratio of just 0.09, which indicates that its share price could move sharply higher during the course of 2015.
AMP Limited
Although its shares are down 3% in the last month, AMP Limited (ASX: AMP) has still posted total shareholder returns of 13.3% per annum over the last three years. That's a superb return and has been aided considerably by AMP's excellent dividends.
For example, AMP currently yields a very enticing (and partially franked) 4.6%, but it's the company's future income prospects that really hold appeal for investors. That's because it is forecast to increase dividends per share at an annualised rate of 11.3% over the next two years, which could mean that shares in AMP yield as much as 5.4% next year.
And, although AMP does trade at a premium to the ASX when it comes to the P/E ratio (15.3 versus 14.9), its excellent income prospects should help to keep investor sentiment buoyant and push its share price higher during the course of the year.
