When it comes to investing in Australia's big four banks, opinion is largely divided. I believe that if you don't already have significant exposure to the sector, then certain banks would make great additions to a balanced portfolio.
My pick of the banks right now would have to be Australia and New Zealand Banking Group (ASX: ANZ). Trading at just 1.3x book value and paying an estimated fully franked 6.4% dividend this year makes it an attractive option. Especially when you take into account the fact that it has already cut its dividend to sustainable levels.
But is now a good time to make an investment in ANZ? It is according to a research note out of global investment bank Morgan Stanley yesterday.
Analysts at Morgan Stanley upgraded ANZ to an outperform rating with a $28.50 price target. That price target implies potential upside of around 6% from the current share price. When combined with its market-beating dividend, investors are looking at a total return of over 12% according to its analysts.
Unfortunately the investment bank isn't bullish on all Australian banks. As well as upgrading ANZ, Morgan Stanley went the other way and downgraded Commonwealth Bank of Australia (ASX: CBA) to an equal-weight rating.
Furthermore, it reduced its price target on Australia's biggest bank from $72.50 to $68. Fears of a need for a future capital raising by the bank are the reason for the bearish stance according to its analysts.
Although I feel Commonwealth Bank is far and away Australia's best run bank, at 2x book value its shares are looking reasonably expensive. For this reason I agree with Morgan Stanley and believe there is a strong chance that its shares may dip lower in the coming months.
Until Commonwealth Bank's shares come down to a fairer price, ANZ is the standout investment in the sector in my view, followed by Westpac Banking Corp (ASX: WBC).
