Diversification matters. At least that's what ANZ (ASX: ANZ) chief executive Mike Smith would tell you if you asked him why the bank made its aggressive move into Asian markets. In the past 10 years, ANZ has lagged its peers in terms of its share price, but I'm predicting it will outperform in the next decade. Here's why.
Structure
ANZ is divided into four major divisions which include Australia, New Zealand, International & Institutional Banking and Global Wealth. In 2013 the divisions had respective operating incomes of $7.8 billion, $2.67 billion, $6.5 billion and $1.5 billion.
The big growth story
Since ANZ launched its aggressive 'Super Regional Strategy' in 2007, the bank has been funneling its efforts (and funds) into booming Asian markets. Although this has been extremely rewarding for the bank in recent years, its ambitious plan to source 25% to 30% of group revenue from its APEA (Asia, Pacific, Europe and Americas) division by 2017 looks to be a tall order.
Having said that the board and its senior management are not pursuing growth for growth's sake. Instead of making expensive acquisitions, Mr Smith and his recently appointed CEO of International and Institutional Banking, Andrew Géczy, are making sensible investment decisions – music to a long-term investor's ears.
Whilst ANZ has been expanding into Asia, Westpac (ASX: WBC), Commonwealth Bank (ASX: CBA) and National Australia Bank (ASX: NAB) have instead focused on gaining market share in Australia. Each have also grown their brand awareness and cut costs.
I believe in the next five to ten years ANZ is likely to differentiate itself from its main rivals and I'm not alone. According to analyst consensus collected by Morningstar, in 2014 ANZ is expected to post earnings growth nearly three times that of its closest rival in the big four – consensus is for a 16% increase in earnings.
While Australia's big banks struggle to grow earnings thanks to a forecast GDP growth rate of only 2.5%, slowing mining investment and subdued confidence, ANZ will be busy expanding operations and revenues overseas.
Is it a buy?
Although I believe ANZ will outperform its peers in the long term, you'll have to pay a high price to get some shares. Shares currently trade on around 14 times earnings. When using Peter Lynch's basic price-earnings-growth ratio this represents a mild undervaluation.
Although it's not a 'bargain' at current prices, I believe it's unlikely to drop to below $30 per share (a price where I would buy) in the next 12 months unless there's a serious setback in the economy – if that did occur, ANZ would be the first bank I'd look to buy.
When purchasing stocks at a slightly higher price, we're accepting more downside risk. However low interest rates, high growth potential and returning confidence levels provide a buffer on its share price – particularly with its high-dividend yield. Long-term investors (i.e. those who intend to hold stocks for five to ten years) should look to add ANZ to their portfolio at any significant drop in its share price – ideally under $30 per share.
Foolish takeaway
With its big dividend yield and ability to leverage growth in Asia the future looks good. It also has good liquidity levels, above peer growth and a focus on keeping lending costs low. I think this makes ANZ the bank with the best long-term prospects.
