October is generally a strong month for banking stocks, as investors position portfolios ahead of the reporting season of Australia's largest banks. With the exception of Commonwealth Bank of Australia (ASX: CBA) (which will provide an interim update), each of Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) are scheduled to release full-year reports starting next Thursday.
Accordingly, I think now is a good time to take stock of the three banks reporting shortly.
ANZ Bank
ANZ releases full-year results on 3 November and goes in to reporting season with a clean slate. Despite reporting a lacklustre first-half performance in May, investors have cheered Australia's third-largest bank (by market capitalisation) over 15% higher since, as concerns around China and industry growth subside.
With management indicating ANZ will pay a final dividend of at least 80 cents per share, the bank trades on a handy trailing yield of about 5.7% (fully franked), leaving it fairly priced going into earnings season, in my opinion.
NAB
NAB is the first of the big four banks to report this earnings season, with management slated to announce full-year results on 27 October. Of key interest to investors will be any degradation in the bank's net interest margin – a lead indicator of bank profitability – and any cut to the dividend amount.
Whilst industry concerns around a housing market crash and slowing credit growth continue, I believe NAB is best poised to withstand these risks due to its heavier weighting to less volatile business lending (relative to the other big four).
Accordingly, with the bank trading on a trailing price-earnings of just under 11x and providing a fully-franked yield of 7.1% (if it's not cut), NAB remains my pick of the bunch.
Westpac
Westpac is scheduled to announce full-year results on 7 November, with investors expecting a cut in dividend payout amidst rising regulatory pressure from APRA. However, with Australia's second-largest stock trading on an industry average price-earnings of 12.5x, the bank appears fully priced going into earnings season.
A downside scenario for Westpac shares is if management decides to raise additional capital to beef-up its tier-1 capital ratios. Hong Kong-based CSLA believes this to be a real possibility given the bank's price-to-book ratio sits at 1.7x, which makes it a compelling time to raise capital if it chooses.
Any such capital raising could spark a sell-off in Westpac shares.
Foolish takeaway
Time will tell whether the doom-and-gloom surrounding the banking industry comes to fruition. However, with each bank trading on attractive yields and seeing slight earnings growth (albeit at lower rates than in the past), I wouldn't recommend selling your big four bank stocks just yet.
However, that's not to imply that investors should go out and buy more shares at current prices. Whilst long-term investors should continue to hold shares in Australia's big four banks as part of a diversified portfolio, the current price of each of the big four leaves little room for error in my opinion.
