The share price performance of National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) couldn't have been more divided over the past decade. Since July 16, 2004, NAB shares are up just 10% while ANZ shares have stacked on an impressive 83%.
The S&P/ASX 200 Index (ASX: XJO) (INDEX: ^AXJO) has returned 55%.
Although it has paid out a juicy fully franked dividend most years, I'm sure NAB shareholders would rather not see this comparison again.
However, as savvy investors know, we don't drive our investment vehicle looking through the rear-view mirror and the next 10 years may just as well see the two banks' results reversed. To determine the best investment, we need to build an understanding of each business.
As we know, share prices are usually indicative of a company's profitability. NAB has had an extremely tough time driving earnings per share higher because of its UK exposure which includes two banking subsidiaries, Yorkshire Bank and Clydesdale Bank and a large portfolio of underperforming commercial property loans.
This "run off" portfolio has since been integrated into the main bank and management have identified it as a major goal to reinvigorating the bank's earnings in coming years. As a result of these ongoing difficulties, it's hard to see NAB significantly and sustainably outperforming the market from its current share price, despite a forecast dividend of nearly 6% fully franked.
On the other hand ANZ, who yields a smaller dividend, has set in motion a sound growth strategy known as The Super Regional Strategy. I think growth in the bank's International and Institutional Banking arm could be the driving force behind ANZ's differentiation from its big bank peers in the next decade.
Whilst Commonwealth Bank of Australia (ASX: CBA) continues to trump its smaller rivals in terms of efficiency and integration of technology into its modern banking platforms, ANZ's foothold in emerging markets could be the start of something big.
To buy, or not?
Unfortunately, I feel now is not the best time to buy ANZ. Despite the likelihood of higher earnings in the near future I'd rather buy big bank shares when interest rates and bad debts rise (which put downwards pressure on earnings and share prices). Until such time, ANZ, in my opinion, remains a 'hold'.
