With the RBA cutting interest rates to 2.25% and set to cut them further during the course of this year, the outlook for the banking sector is a whole lot brighter. Not only is it likely to mean an improvement in the wider economic outlook, it should also reduce the default rate on loans, since they will cost less to service. Furthermore, demand for new loans may increase due to improving consumer and business confidence, which should bode well for the bottom lines of Aussie-focused banks.
However, with a time lag likely to be present between interest rate cuts and their impact on the economy, is now really the perfect time to buy a slice of Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd. (ASX: NAB)?
Australia and New Zealand Banking Group
With a price to earnings (P/E) ratio of 13.7, ANZ seems to offer good value when you consider that the ASX has a P/E ratio of 16.7 and the wider banking sector has a P/E ratio of 15.3. And, with the bank's super regional strategy yet to fully have an impact on the bottom line, the long-term growth outlook for ANZ remains positive, since it is set to generate a greater proportion of revenue from faster growing economies across Asia.
Of course, ANZ's dividend yield of 5% and dividend growth forecasts for a rise in shareholder payouts of 5% per annum during the next two years remains hugely appealing. And, with an excellent track record of increasing earnings by 9.5% per annum over the last five years, ANZ seems to be an excellent long-term buy at the present time.
Commonwealth Bank of Australia
The past performance of CBA is quite exceptional, with it having increased its bottom line at an annualised rate of 11.6% during the last five years. And growth of 7% per annum is currently being forecast for the next two years, which is roughly in-line with that of the wider index and makes CBA's P/E ratio of 16.7 seem fully justified.
In terms of a catalyst, CBA's relative stability could improve investor sentiment and send its shares higher during a challenging period for the Aussie economy. For example, it yields 4.4% and has a beta of just 0.8. As such, now seems to be a good time to buy a slice of it.
National Australia Bank Ltd.
Over the next two years, NAB is forecast to increase its bottom line at an annualised rate of 17%. When combined with its P/E ratio of 15.9, this equates to a price to earnings growth (PEG) ratio of just 0.94, which is significantly below the ASX's PEG ratio of 2.43 and also less than the wider banking sector's PEG ratio of 1.82.
And, while the performance of its UK subsidiaries has been disappointing and insider trading allegations are a potential risk that could hurt the bank's share price moving forward, its yield of 5.2% and dividend growth forecasts of 5.6% per annum over the next two years could prove to be major catalysts (alongside its great value share price) that push its shares higher.
