Australian investors have over the past week had the opportunity to review the performance of the major banks which is of course important considering bank stocks are core portfolio holdings for many Australian investors and superannuation funds.
With Commonwealth Bank of Australia (ASX: CBA) operating on a June year end the CBA's half yearly results have been known to the market since February, however, on Monday investors have had the opportunity to review the group's third-quarter results.
Meanwhile, the other three majors, Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC) operate on a September year end and all just released their half yearly numbers.
One fund manager which has run the numbers on the performance of each bank is Aurora Funds Management. Here are some of Aurora's key findings:
- Commonwealth Bank had the highest revenue growth achieving 5%
- Commonwealth Bank had the highest cash earnings growth reporting a 6.4% increase
- Westpac Bank had the best dividend growth at 1%
- Westpac Bank reported the highest net interest margin at 2.14%
- National Australia Bank reported the lowest impairment charge as a percentage of loans at just 0.14%
- Commonwealth Bank's return on equity was the highest at 17%
On balance, the metrics tend to suggest to me that Commonwealth Bank looks to be the highest quality offering. From an investment point of view the issue then becomes whether the Commonwealth Bank is also the most attractively priced bank on a risk-reward basis.
According to Aurora's data of forward estimates for earnings and dividends Commonwealth Bank trades on the highest price-to-earnings (PE) multiple at 13.5 times and with the lowest dividend yield at 5.7%.
In contrast, ANZ Bank is trading on the lowest forecast PE at 12.3 times and with a dividend yield of 6.4% which only trails National Australia Bank's forecast yield of 6.9%.
Whilst its certainly reasonable to pay up for quality and growth prospects, given the nature of the Australian domestic banking industry, in my opinion there is little reason to presume that Commonwealth Bank can continually achieve better operating metrics than its peers.
Reversion to the mean could well see all four companies trading at more similar operating metrics in the future. This leads me to favour the cheaper pricing of ANZ Bank's shares.
