Which bank stock should you own?

They’re the most profitable in the world, but which one is the best?

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Australia’s banks have been criticised for giving too much to shareholders and directors whilst cutting local jobs and withholding interest rates, but if you asked them if they’d do it again, the answer would probably be yes.

Australia’s biggest banks — NAB (ASX: NAB), ANZ (ASX: ANZ), Commonwealth (ASX: CBA) and Westpac (ASX: WBC) — are, calculated by a return on assets, the most profitable in the world. With pre-tax profits of 1.18% total assets for the past year, they’ve been the top banks for three years running.

So if they’re all making stellar profits, which one is right for your portfolio? Many investors have been asking themselves this in spite of the recent banking bubble, which claimed up to 19% of bank stock prices. At the time bank stocks were clung to by hopefuls looking to make a quick “safe” profit from dividend chasing investors, as a result of interest rates falling. Now, they’re discounted from the their 12 month highs and are ready for the picking.

The Commonwealth Bank, like Telstra (ASX: TLS), is a safe stock that many investors cling to when times get tough and it’s not hard to see why. Despite the GFC and both housing and mining booms both ending, the CBA has managed to turn huge profits and, as a result, send its share price sky high. Ten years ago its share price was sitting around $31.41 but now is over 115% higher at $65.61 and has paid healthy dividends along the way. It seems that when other stock prices crumble under market pressure, the CBA finds it feet and offers a large degree of safety. Investors have proven that safety is worth paying for.

Income investors love banking stocks because they know the big four offer some of the best fully franked dividends and provide steady growth. Of the big banks, NAB and Westpac offer the best return, at 6.4% and 6.2% respectively. Together with the reputation of the best banks in the world what more could investors ask for?

ANZ has answered that question by giving more growth potential. Not only has it kept the status of most efficient bank in terms of domestic ROA for two years, it has also begun a strategic international expansion known as the ‘Super Regional Strategy’, which was launched back in 2007 by current CEO Mike Smith. Mr Smith believes the region will be host to huge financial gains for the company in the coming decades as Asian economies begin to grow faster. The bank also pays a 5.3% fully franked dividend.

Foolish takeaway

No matter which bank you choose, they all provide something different and pay handsome dividends with the backing of a great economy and large balance sheets. If the recent bubble has taught us anything, it’s that the most important thing when investing in bank stocks, is to buy at the right price.

The Australian Financial Review says “good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit.” Get “3 Stocks for the Great Dividend Boom” in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

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Motley Fool contributor Owen Raszkiewicz owns shares ANZ.

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