National Australia Bank Ltd. (ASX: NAB) shares and Macquarie Group Ltd (ASX: MQG) shares are the big banks I'd buy first.
Why NAB and Macquarie shares?
For the record, I'm not buying any of the big banks right now. But when their share prices drop — and they will, it's a matter of time — I'll run the rule over them.
But if I was to buy some bank shares, I'd pick NAB and Macquarie first.
National Australia Bank is Australia's third largest bank, behind Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC). On the balance sheets of Commonwealth Bank of Australia and Westpac, around 50% of Australia's mortgages can be found.
Indeed, both of Australia's two biggest banks have an enormous exposure to residential lending. Now, I'll admit that exposure to mortgages has worked very well for them over the past two decades, as interest rates have fallen and house prices have shot up.
Not only has the affordability of debt (i.e. lower interest rates) improved, more people are working (e.g. both parents in a family), the capital gains tax discount was introduced, self-managed superannuation funds blossomed and supply/demand of housing has been favourable.
However, I do not believe (read: opinion) the same drivers of CBA's and Westpac's growth will deliver the goods for shareholders in the next decade. Although it may not seem like it, I think the big banks are very fragile at this time, with stretched balance sheets and very slim profit margins.
That's where NAB comes in.
NAB has exposure to mortgages, but less than each of its peers, including Australia and New Zealand Banking Group (ASX: ANZ). However, NAB is amongst the leaders in commercial lending, to small and medium businesses. Like home lending, the profits from business banking ebb and flow in line with the economy.
I'm also very pleased to hear scuttlebutts that NAB's lending standards have not slipped in recent times. If you are a long-term bank shareholder, the last thing you want is your bank growing 'above system' (meaning: 'above average') when the housing market is near its top. Remember, the term of new mortgages are typically 25 to 30 years!
Next up, Macquarie. Macquarie is Australia's fifth largest bank by sharemarket valuation, but it is Australia's biggest and best investment bank. Indeed, the Big Four banks are 'retail' banks first and foremost, meaning they specialise in things that customers like you and I would need.
But Macquarie does more interesting things. Aeroplane finance, infrastructure management, stock research and everything in between.
I also like Macquarie because it has global exposure, in a good way. It makes a bigger chunk of its profits overseas than here in Australia. With more than 98% of the world's investment opportunities outside of Australia, I think Macquarie Group shares provide a healthy dose of diversification and growth potential for local investors.
Buy, Hold or Sell
At today's prices, I'm not a buyer of Macquarie and NAB shares. I would like to own their shares, but I'd prefer to wait for a more compelling entry point. And I like my chances. After all, banks are cyclical.
