Is the Australia and New Zealand Banking Group (ASX: ANZ) share price a buy after falling 15% over the past year?
Some investors would say yes. ANZ is trading with some of the most attractive metrics that it has in years. For example, it's trading at under 11x FY19's estimated earnings with a trailing grossed-up dividend yield of 9.3%.
That's a very attractive yield for a business with a dividend payout ratio of only 71.6% of continuing operations cash earnings per share (EPS). Imagine if the payout was above 90% like a lot of real estate investment trusts (REITs).
The sore point for ANZ, Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and AMP Limited (ASX: AMP) shareholders has been the Royal Commission. Of course, getting caught wasn't the problem – doing the bad acts in the first place was their downfall.
Within ANZ's continuing earnings it recognised $295 million of customer remediation and another $38 million of external legal costs. Ouch! Who knows how much those two cost categories will cost in FY19, but it's likely that there will be more costs to come.
Despite those costs, ANZ still managed to achieve the same statutory earnings as last year, although continuing operations cash profit after tax fell 5%.
Politicians and regulators are coming down on the banking sector. Dropping all of these questionable activities whilst having to hold more capital is probably going to be a long-term drag on profit growth. Obviously everyone should want the banks to act fairly and be unquestionably strong, but it hurts the investment case.
ANZ has made good progress with the CET1 ratio, in FY18 it increased by 87 basis points to 11.4%.
With ANZ divesting some of its subsidiaries it's hard to see where the long-term growth of earnings is going to come from. Previously, I would have thought Asia would be a good bet, but ANZ has been pulling back from area too.
Foolish takeaway
ANZ looks cheap, but ultimately its earnings and returns will be linked to the strength of the Australian economy and the housing market. I'd rather be a bit late than early (or wrong) with that call.
I believe there are many growth shares out there with better growth prospects than ANZ.
