Australia and New Zealand Banking Group (ASX: ANZ) is our country's third biggest bank and the most heavily leveraged to Asian markets. It's currently undergoing a transformation to become a super-regional financial institution.
However it has many similarities to its domestically-focused Aussie peers. Like each of the big banks, it pays a handsome dividend – equivalent to 5.1% fully franked at current prices – and had a tremendous run-up in value during 2013, as investors flocked back to the stock market in an attempt to counteract the low interest rates on offer from term deposits and savings accounts.
In addition, even though ANZ is growing its exposure in Asia, it accounts for only 17% of group revenue meaning that a majority of its earnings are derived from Australia and, to a lesser extent, New Zealand. So what can we expect from the banks in the next decade?
In the past 20 years, the big banks have been the primary beneficiaries of the housing boom which, quite frankly, enabled people will little or no investing experience to notch-up truly fantastic capital gains. However as was witnessed in the aftermath of the GFC when Suncorp Group Ltd (ASX: SUN) was slapped with $17 billion in bad debts, the possibility of house prices dropping is a very real threat to our big banks who are so heavily leveraged to both the commercial and residential property markets.
What's more, the market for mortgages is becoming increasingly competitive with brokers like Mortgage Choice Limited (ASX: MOC), Homeloans Limited (ASX: HOM) and Yellow Brick Road Holdings Ltd (ASX: YBR) cutting into the banks' profits by offering customers more choice. Other lenders like Bank of Queensland Limited (ASX: BOQ) and Bendigo and Adelaide Bank Limited (ASX: BEN) are increasing their exposure to the mortgage market, sometimes offering better interest rates than the big four in a hope to steal their customers.
This has been evident in the falling net interest margins (NIMs) which are a key measure of banking profitability. It's the amount of money they can peel off between deposits and loan interest rates.
Unlike the Commonwealth Bank of Australia (ASX: CBA), who has the greatest exposure to mortgages, ANZ remains the most profitable bank based on NIMs. In 2013 their margins were 2.13% and 2.22%, respectively. However excluding ANZ's Global Markets division (its fastest growing business in Asia) its figure grows to 2.63%, much higher than any of its peers.
Foolish takeaway
By all accounts, it appears ANZ is the superior bank to its rivals because it is the most efficient local lender and has a growing exposure to Asian markets. However in recent times its share price has become demanding. So now might not be the time to buy in.
When interest rate rises, it'll put downwards pressure on all big banks' shares prices and bad and doubtful debts will increase as a result, lowering earnings. If prices drop, investors should look to add ANZ to their portfolios for both its juicy fully franked dividend and Asian growth story.