Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) are being hammered, along with the rest of the market today, adding to recent falls.
In lunchtime trading, the S&P/ASX 200 (Indexasx: XJO) (ASX: XJO) is down 1.3%, despite gains on Wall Street overnight.
As I mentioned earlier this week, the index is down 7% since the end of April, when the S&P/ASX 200 went so close to passing through the 6,000 mark. Over the same period, the banks have dropped between 9.4% and 15.8%, with NAB and Westpac the biggest losers and ANZ and CBA posting sub-10% falls.
Thanks to the falling prices, the banks look attractive, with trailing P/E ratios of between 12.4x and 15.4x and fully franked dividend yields of between 5.1% and 6%, before grossing up for franking credits. On a gross basis, we're talking returns of 7.3% to 8.6%. Even if the big 4 banks generated no earnings growth from here, those yields are attractive.
When considering the big four banks, there's a number of valuation ratios we need to consider. Price to book value per share (P/B), return on equity (ROE) and we'll add in dividend yield for good measure. The following tables provide a comparison of each of the big four.
As you can see, ANZ looks cheap when comparing the bank's current P/E and P/B ratios to historical values. NAB looks cheap on a P/B basis, while Westpac is trading below its historical P/E average.
Clearly that suggests that CBA is the most expensive bank currently – but it is regarded as Australia's best bank – not least because its return on equity stands at a whopping 18%.
On a number of other measures ANZ appears to be the second-best pick. Over the past 10 years, ANZ has grown dividends by 6% each year on average – only CBA has generated a higher rate of growth at 8%. ANZ has also generated compound annual profit growth of 16% over the past 5 years, again behind CBA with 24%.
But ANZ also has a number of advantages over the other banks. The bank earns around 60% of its cash profits from non-Australia business (which includes mortgages and small business lending), as you can see from the chart below.
International and institutional banking, New Zealand operations and Global Wealth all contribute significant amounts.
By comparison, Westpac and NAB earn an estimated 78% and 56% respectively from their Australian lending operations, although these two banks make it difficult to determine exact percentages due to obscure reporting. As an example, NAB includes institutional and business banking in its Australia division. CBA earns 40% of its cash profit from retail banking, more in line with ANZ.
Foolish takeaway
The important point to note though is that the big four face a number of potential headwinds including the outcomes from the Financial System Inquiry, ongoing consumer confidence issues to do with financial planning, investigation by the corporate watchdog over interest rate and currency manipulation and a potential downturn in the economy.
That's not to mention large exposure to Australia's hot property market in a number of capital cities.
Given ANZ's exposure to Asia and other sectors and its cheaper price relative to both its peers and its historical average, it would be my pick of the big four banks, followed by Westpac, CBA and then NAB. It might also be interesting to see if and when Warren Buffett follows through with his comments that "there's a good chance that five years from now, we will have bought one or more positions in Australian banks."
Could the first one be ANZ?
