Macquarie Group Ltd (ASX: MQG), Australia and New Zealand Banking Group (ASX: ANZ) and Bank of Queensland (ASX: BOQ) are Australia's best banks. I think each have promising growth strategies, unlike National Australia Bank Ltd (ASX: NAB) and Westpac Banking Group (ASX: WBC), yet each seem to be overlooked by many investors who are fixated on Commonwealth Bank of Australia (ASX: CBA).
In the past year ANZ, Macquarie and BOQ are up 27%, 38% and 49%, respectively, compared to a return of just 16% from the S&P/ASX 200 (ASX: XJO) (INDEXASX: XJO). So are they now too expensive or can investors expect more of the same? Here's what I think we can expect from them in the coming years.
Macquarie Group
Macquarie is Australia's premier investment bank with exposure to markets throughout much of the world including Asia, the Americas and Europe. After posting huge increases in profit in FY14, management are forecasting growth to be modestly higher in FY15, although the increases will be largely dependent on confidence levels in global markets.
I believe Macquarie, in the long-term, will be able to leverage growth from the niche market areas in which it has a dominant position, examples include commodities research and mergers and acquisitions (M&A). Based on analysts' forecasts, Macquarie trades on a forward price to earnings ratio (PE) of 14.6 (which is not unreasonable) and dividend yield of 4.8%. I rate it as a good buy, but not a great one.
ANZ Banking Group
In my opinion, ANZ will be the fastest growing "major" bank in the next 5 to 10 years. Its Asian exposure will be a key earnings driver in coming years. This has been highlighted by NAB and Westpac's belated attempts to capitalise on trade flows to and from the region. In Australia and New Zealand it enjoys healthy margins and strong brand recognition.
However no stock is a buy at any price and whilst a genuine argument could be held as to why now could be the time to buy its stock, I believe the best time to buy bank shares is when they are down and out, not during times of heightened demand for dividend stocks (like ANZ). Or when share prices are at all-time highs and bad debts are at record lows. I'm adopting a wait-and-see approach for now but will look to add ANZ to my portfolio, ahead of the other big four banks, when prices fall (relative to earnings per share).
Bank of Queensland
BOQ is much smaller than the aforementioned institutions, currently boasting a market capitalisation of just $4.4 billion. Given its relative underexposure to states other than Queensland (currently 57% of total loans come from QLD), investors have had reason to be excited about its growth prospects.
To their credit, BOQ's management has been able to deliver on a number of promising and profitable growth targets such as a lower cost to income ratio, increased business lending, wider net interest margins and increased liquidity. These are four things which the major banks have failed to do, in recent times. The bank is now targeting brokers and increased branch productivity to boost earnings.
An even better buy than bank stocks
BOQ is forecast to pay a 65 cent dividend (representing a yield of 5% fully franked) and tipped to modestly grow earnings per share in the coming year, I'd buy Bank of Queensland before Westpac, NAB or CBA. However, like any stock, I believe an investment in a bank is best done when fear reigns the market and prices are low. Like Macquarie I would rate ANZ and BOQ as good buys, but not great.
