Australia and New Zealand Banking Group (ASX: ANZ) isn't like its rivals…
Unlike Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC), who have been squabbling over the local mortgage market, ANZ has been fixated on the booming economies of Asia since 2007, when current CEO Mike Smith launched the bank's Super Regional Strategy.
During its most recent reporting period, ANZ's key overseas markets accounted for an impressive 20.2% of group profit.
However, ANZ recognises its local operations in Australia and New Zealand are key to success in foreign markets and has grown Australian home lending above system for each of the past five years.
Valuation
Anyone who has ever gazed into a bank's annual report will know they're very complex. However ANZ regularly publishes figures that can be used to determine the relative valuation of its shares.
Currently, it trades on a price-earnings ratio of 13x, dividend yield of 5.5% fully franked and price-book ratio of 1.89x. This compares to rival National Australia Bank Ltd's (ASX: NAB) PE ratio of 14.5x, PB ratio of 1.92x and dividend yield of 5.5%.
However on closer inspection, ANZ is clearly more profitable than NAB with a return on equity of 14.7%, return on assets of 0.89%, operating expense ratio of 45.1% and net interest margin of 2.04%.
Risks
ANZ – like all banks – isn't immune from market cycles. However, arguably, its exposure to Asia makes ANZ more vulnerable to a slowdown in those economies. As NAB's former management can attest, Australia's largest financial institutions have a poor track record overseas.
Another key risk to each of the big four banks is the Australian economy. Following an unprecedented China-fuelled mining boom, which has enabled our country to last almost 25 years without a recession, our economy is now expected to enter a rough patch.
As a result we'll likely see rising unemployment and slower wage growth in coming years, these are two things which threaten the viability of the recent surge in house prices throughout the country.
Buy, Hold or Sell?
Currently, big bank stocks are trading at very expensive valuations at a time when credit growth (i.e. demand for loans) could be expected to weigh on their record profits. As ANZ CEO Mike Smith said at the bank's half-year results presentation last week, "For the foreseeable future, we will be operating in a lower growth environment in which there will continue to be occasional volatility and shocks."
Personally, ANZ is my pick of the big banks. However I do not believe now is a good time to buy its shares and if I currently held some I'd look to take some profits off the table.
