The big four banks make up around a quarter of the total market capitalisation of the ASX. Over the last couple of years, they have driven impressive returns for many investors, and they continue to offer impressive dividend yields.
Australia and New Zealand Banking Group (ASX: ANZ) is considered the most likely to grow, largely because of its strategy of expanding into Asia. Commonwealth Bank of Australia (ASX: CBA) has the biggest exposure to the Australian property market, so if Australians continue to pay up for houses, the bank is likely to benefit. National Australia Bank Ltd (ASX: NAB) famously expanded (unsuccessfully) in the UK, and as a result has lagged the other banks over the very long term. It is still sorting out that debacle.
That brings us to Westpac Banking Corp (ASX: WBC), where does it stand? Well, Westpac has managed fairly well in recent years, and the bank merged with St George during the aftermath of the GFC, giving it another trusted brand. Here are four reasons why I think Westpac is the best Aussie bank.
- Westpac has the second biggest exposure to the Australian housing market after Commonwealth Bank, and as a result, the company boasts a five-year average return on assets of almost 1%, considerably higher than both ANZ and NAB.
- Westpac is planning to build up its so-called "wealth management" division. With more and more people setting up self-managed superannuation funds, I think this is a prudent area of business to focus on.
- Westpac has relatively low exposure to foreign countries. Only about 12% of loans are to foreign borrowers, compared to 32% for ANZ and 25% for NAB.
- Commonwealth Bank has a Price to Book ratio of 2.82 compared to Westpac's ratio of 2.38. Commonwealth Bank is forecast to grow earnings per share by about 17% from FY 2013 to FY 2015, whereas Westpac is forecast to grow EPS by about 10% over the same period. Put simply, I think analysts' targets for Westpac are more achievable. Although I think Westpac and Commonwealth Bank have similar advantages, I believe Westpac is more likely to surprise the market in a positive way.
- Westpac has the lowest exposure to coal miners of all the Australian banks, and is considered the most ethical of the big four banks by the Centre for Australian Ethical Research. As the world turns to divestment campaigns, and coal companies struggle, Westpac stands to benefit. Finally, the Bank has recently launched the Westpac Bicentennial Foundation, a $100 million scholarship fund that serves the dual function of improving education and generating positive PR.
Foolish takeaway
I'm not a buyer of Westpac shares at current prices, but for the five reasons above, I believe it is the best Australian bank to own. On top of that, its current CEO Gail Kelly is one of the foremost businesswomen in Australia, and she started as a bank teller. How many bank CEOs have that kind of experience? Kelly oversees Westpac's culture, and I believe Westpac shareholders can trust her to lead the bank to a rosy future.
