Australia and New Zealand Banking Group's (ASX: ANZ) expansion into Asian markets has had its critics, but today it continued to prove them wrong.
When CEO Mike Smith launched the bank's 'Super Regional' strategy in 2007, he wanted to create an institution which was a safe and growing avenue for investors to gain exposure to Asian markets. It's safe to say, so far, he made the right call.
While ANZ's peers, such as the Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and – to a large extent – National Australia Bank Ltd (ASX: NAB) have been domestically focused on mortgages and business banking, ANZ has managed to keep pace with and excel in local markets, whilst also pursuing growth overseas.
In 2013, ANZ grew its exposure to both business and retail banking at a faster pace than its competitors and this has been reflected in its stand-out results in its first quarter to 31 December 2013. Today the bank announced an unaudited cash profit of $1.73 billion for the period, an increase of 13% on the same period last year. Cash profit is the preferred measure since it excludes one-off items.
Whilst low interest rates put slight pressure on the net interest margin (a key measure of banking profitability), improving confidence in markets led the bank to expect the provision charge on bad and doubtful debts to be 10% lower in FY14 compared to FY13.
Data sourced from ANZ 1Q 2014 Trading Update
Mr Smith said: "The bottom line is that we have made a good start to 2014," and I couldn't agree more.
Recently, there has been speculation the turbulence in Asian markets would put pressure on the bank's growth strategy but the results from its International and Institutional Banking division rebuffed the scepticism and it looks to have "performed well." Within the division, Global Markets was a strong performer and delivered 53% of the first-quarter market income, just over $600 million in revenue – up 5.7% on the prior period (FX adjusted).
In order to maintain a strong and compliant balance of tier-1 capital, the bank announced it will issue capital notes to the approximate value of $1 billion, in part, to refinance CPS1 which was issued in 2008 and is expected to convert in June. ANZ's APRA Basel III CET1 ratio at 31 December was 7.9%, equating to 9.9% on an internationally harmonised basis, and the level was affected by the payment of the group's final dividend in FY13.
Foolish takeaway
Foolish (capital 'F') investors have watched as many Australian companies ventured overseas only to come back with their tail between their legs. ANZ's growth strategy gives the bank an advantage over its domestically focused peers. However, despite its recent share price growth (and even more recent fall), it may not be a standout 'buy'.
No stock is a buy at any price and savvy investors always buy good companies at good prices, which may mean now is not a good time to buy ANZ. Currently, ANZ trades above its 10-year annual average price-earnings ratio of 12 – although this could be partially justified because of its growth strategy.
Investors may be able to pick up ANZ shares at a lower price in 6, 12 or 24 months. The reasoning behind my prediction is investors' desire for high-yielding bank stocks will slow once interest rates begin rising (perhaps in early 2015). Also if bad debts increase (they are near all-time lows) ANZ's profit will be significantly affected. Both factors will put downward pressure on the bank's share price.
Of course, investors run the risk of seeing this growing blue chip pay out higher dividends and never drop in price. However, there are still plenty of high-yielding growth stocks available on the market at great prices.
