If you're new to the stock market, you probably wouldn't know that each of the big banks offer substantially different growth models.
For a long time, the domestic mortgage market has been ground zero for top and bottom line growth. The banks have been locked in a battle to capture a greater share of the home-loan market but – recently – they have shifted their focus.
In the past five to 10 years, each of the big four have pursued their goals and some have failed while some have succeeded. For example, National Australia Bank Ltd's (ASX: NAB) venture into the UK was a disaster – particularly after the GFC – and although the UK business has been absorbed into the group, its resulted in NAB having less than perfect balance sheets. Still it's above peer exposure to business customers will allow the bank to grow earnings when confidence eventually returns to markets. It will likely run down its poorly performing UK assets this year.
Conversely, Westpac Banking Corp (ASX: WBC) has only had Australia in its crosshairs. It rebranded itself with Bank of Melbourne, Bank SA, RAMS and St George in a bid to grow market share. During the recent rate cuts, Westpac failed to pass on the reductions to mortgagees which has resulted in lower market share of mortgages and sub-par growth. This looks an example of short-term thinking.
In this Fool's opinion, the two 'Big' banks which stand out most are Australia and New Zealand Banking Group (ASX: ANZ) and Commonwealth Bank of Australia (ASX: CBA).
ANZ has developed a plan to expand and compete in Asian markets. It has, so far, successfully done so. Its goal is to grow its APEA division to 25% to 30% of total group revenue by 2017. It has the most aggressive growth model of the big banks and, as a result, analysts are expecting above peer earnings – approximately 17% higher in 2014 compared to the prior period.
Commonwealth Bank has won the battle for mortgages and has better technology capability than its peers. It continues to recognise the possibility of technology to replace traditional banking institutions. It's no wonder why. Recently, over in the US, AT&T (a mobile carrier) is rumoured to be piloting a 'card' technology that will allow customers to use their mobile phone as a bank account which they can recharge in store. For that reason, coupled with its dominance in the mortgage market, Commonwealth Bank is the bank stock for investors who want long-term safety.
Foolish takeaway
You've probably heard it before but bank stocks are overvalued. If you're an older shareholder, you'll no doubt be enjoying high-dividend yields and staring at your profit and loss statement on your broking account enjoying the strong run up in your bank share prices. However, the slowdown in resources, pressure on net interest margins and record-low bad debts make the current bank prices unreasonable for investors looking for short to medium-term exposure to the industry. When prices do drop however, look to add ANZ for growth and Commonwealth Bank for safety.