For investors in Suncorp Group Ltd (ASX: SUN) and Australia and New Zealand Banking Group (ASX: ANZ), 2015 has been a rather disappointing year thus far. That's because shares in the two financial services companies are up just 0.5% and 1% respectively, which is a considerably worse performance than the ASX, which has risen by 4% year-to-date.
Clearly, both stocks have significant banking divisions and, as such, are expected to benefit from a looser monetary policy, with the RBA's decision to cut rates this year likely to have a positive impact on their bottom lines over the medium term. That's because demand for their loans could increase, while default rates are aided as the cost of borrowing declines.
As a result, their bottom lines are set to offer growth in each of the next two years. However, Suncorp offers a significantly higher earnings growth rate than ANZ, with the former's net profit forecast to rise by 63% in the year ending June 2015, and by a further 8% in the year to June 2016. That's a significantly higher growth rate than ANZ, which is due to post an annualised increase in its bottom line of 3.8% during the next two financial years.
Perhaps expectedly given its higher growth rate, Suncorp trades at a premium to ANZ. For example, Suncorp has a price to earnings (P/E) ratio of 15.2, while ANZ's is substantially lower at 12.2. In fact, both stocks trade at significant discounts to their respective sectors, with the wider insurance sector (to which Suncorp belongs) having a P/E ratio of 19, while the banking sector (to which ANZ belongs) currently trades on a rating of 14.1.
However, when their earnings growth rates and ratings are combined, Suncorp seems to offer the greatest potential. It has a price to earnings growth (PEG) ratio of just 0.47, which is much lower than ANZ's PEG ratio of 3.2 and indicates that its shares have the greatest capital upside.
That's especially the case as a result of Suncorp implementing a strategy to create significant efficiencies and streamline its business model. And, with further cost savings such as the move to switch its computer systems to cloud-based alternatives not yet complete, there appears to be significant scope for improved margins over the medium term – even though the Aussie insurance market is becoming an increasingly competitive space.
Of course, ANZ also has a sound strategy. Its Super Regional Strategy is gaining momentum and has left the bank less exposed to the slowing Aussie economy than many of its rivals. And, with Asia in particular offering tremendous long-term growth prospects, the financial performance of ANZ could realistically pick up strongly over the medium to long term – particularly if, as expected, the Aussie dollar continues to weaken.
However, while ANZ is a top quality stock with the potential to post excellent capital gains, Suncorp's more appealing growth prospects appear to offer a clearer catalyst to improve investor sentiment and push its shares higher. And, with further cost savings yet to be realised, now could be a great time to buy a slice of it.
