Shares of Australia and New Zealand Banking Group (ASX: ANZ) have enjoyed a fantastic run over recent years, following a 60% fall during the Global Financial Crisis which saw them bottom out around $12 per share.
Soaring more than 170% since then, it might be time once again to acknowledge that ANZ shares may be fairly – if not overly – priced.
Growth, growth, growth
ANZ is unique amongst the 'Big Four' Australian banks because it is the only one actively seeking to expand and compete in Asian markets.
Launched in 2007, CEO Mike Smith's Super Regional Strategy has already begun to bring home the bacon. More than 20% of group profits are generated outside ANZ's key markets of Australia and New Zealand.
In local markets, our fourth-largest bank by assets and third largest by market capitalisation has grown strongly and profitably.
Moreover, its net interest margin in Australia and New Zealand was an exceptional 2.5% last year. By comparison, Commonwealth Bank of Australia's (ASX: CBA) group net interest margin was 2.14% last year, whilst National Australia Bank Ltd's (ASX: NAB) was 1.92%.
The net interest margin, or NIM, is the difference between the interest rate which a bank charges on loans, and what it must pay on deposits. It's a key measure of profitability.
Whilst the small percentage point differences in NIMs between the banks mightn't sound like much, when you have $660 billion of interest earning assets – as ANZ does – small percentage changes have a profound effect on profit.
Valuation
Based on its price-earnings ratio, currently 12.6x, ANZ shares don't appear very expensive.
However, using a P/E to value a bank stock is very dangerous. Indeed, not only will the 'p' change every day, and the 'e' likely every six months, bank profits are heavily cyclical which makes the P/E an even less reliable measure of value.
For example, right before the GFC hit, ANZ had a P/E of 11x and many people believed it was cheap. A year later, following a sharp drop in profits, its P/E blew out to over 19x!
ANZ currently trades at 1.92x its net assets, or book value. Whilst that may be lower than the P/B ratios of both Westpac Banking Corp (ASX: WBC) and CommBank (currently 2.12x and 2.82x, respectively), it still doesn't scream bargain to me.
During the lows of the GFC, ANZ had a much more respectable P/B ratio of 1.2x.
The global rule of thumb is to buy bank stocks below a P/B of 1x. However, given ANZ's dominance and profitability in local markets, personally, a ratio closer to 1.2x might be justifiable.
Using a basic dividend discount model, I believe ANZ shares are likely worth around $31.00. So, at a current $33.35 per share, I'm not buying in.
I'd look to add ANZ shares to my portfolio if/when they back trading below $22 per share – to ensure a healthy margin of safety.
But until then, I'll be adding other great dividend stocks to my portfolio…
