Australia and New Zealand Banking Group (ASX: ANZ) is Australia's premier regional financial institution. With a big dividend, dominating operations in New Zealand and ongoing growth in the local market, it's little wonder its share price is so high.
But does it deserve such a high price tag? Let's take a look at its track record and future prospects to determine whether now is the right time to buy.
The past
Since 1999, ANZ's share price has rallied over 200% not including dividends. That's despite the dotcom bubble and GFC taking its toll on businesses and individuals worldwide. It also survived a mild setback in Australian property prices post-GFC and has since grown into a more efficient lender.
In 2007, current CEO Mike Smith introduced the 'Super Regional Strategy' with the intention of growing the bank's presence throughout Asia. He, and his management team, have since set a target of drawing 25% to 30% of revenues from its Asia, Pacific, Europe and Americas division by 2017. Currently the figure stands at 17%.
However, the bank has also benefitted from an outstanding economic growth period, whereby property prices have blossomed and Australian miners pushed the rest of the economy. For the past 20 years Australia has achieved GDP growth, while countries such as Canada and New Zealand failed to do so between 2007 and 2010.
The present
As a result of the ongoing growth, the ratio of house prices to annual household income is near all-time highs and the same price appreciation is unlikely to continue forever nor is the continuous economic growth. Although this would be more detrimental to Commonwealth Bank of Australia's (ASX: CBA) and Westpac Banking Corp's (ASX: WBC) earnings – thanks to a larger proportion of their income being derived from the mortgage market and retail banking – ANZ will still be in the firing line.
The future
Over the past 10 years, ANZ shares have an average annual price-earnings ratio of 12.77, yet have averaged 4.5% earnings growth. Currently shares trade on 15.79 times FY13 earnings but, according to Morningstar's analyst consensus, earnings per share is expected to grow by greater than 10% in FY14.
Much of this growth is likely to be a result of the boost in both consumer and business confidence following the RBA's decision to cut interest rates to record lows. In addition International and Institutional Business Banking (IIB) segment, led by the Global Markets business and Global Wealth divisions can also be expected to notch-up double digit growth in FY14.
However in the medium term, ANZ will be unlikely to maintain its earnings growth and share price appreciation at current rates. As interest rates rise, so too will bad debts and the appeal of term deposits against income stocks, therefore putting downwards pressure on its share price.
Foolish takeaway
The best time to buy bank shares (like any share) is when they're cheapest and that'll only occur in times of uncertainty such as when global markets get rattled by a GFC-like event or, in the domestic market, a setback in property prices. ANZ trades on a price to book ratio of 2.08 and an earnings multiple as high as 15, while its Asian-focused global peers such as Standard Chartered PLC (LON: STAN) trade on a P/E of just 10.
Although it is the most promising of the big four banks, while cheaper alternatives such as Macquarie Group Ltd (ASX: MQG) and Telstra Corporation Ltd (ASX: TLS) present themselves as reliable long-term ways to tap into Asia's growth, without the likelihood of downside risks in the medium term, perhaps now is not the time to buy to ANZ.
