Your instant 3-share banking portfolio

Whether you’re seeking growth, income or safety, the ASX’s banking stocks have it all.

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The top Australian banks have been called all sorts of things in past year including “overvalued”, “expensive” and “most profitable in the world”. So which banks are the right ones to own and fit best into your investing strategy? 

Safety

Many people invest in the stock market forgetting that it’s a volatile place, where one day you can lose 10% and the next you can gain 12%. For some, including those that own shares through SMSFs, investing in blue chips is believed to be a tried and true way to protect your wealth in the short term and receive healthy dividends along the way.

At the top of the safety chain is  Commonwealth Bank (ASX: CBA). With a market cap of $111 billion and the title of Australia’s largest mortgage lender, CBA is at the top of the pecking order for many investors wanting a safe return and you wouldn’t criticise them for believing it’s a healthy place for their money. Over the past 10 years it’s returned a massive 142% plus dividends. However, at current prices and with little room for growth, investors looking for income may want to look elsewhere.

Income

Out of the S&P/ASX 20 (ASX: XTL), the National Australia Bank (ASX: NAB) pays the highest return to shareholders, boasting a dividend yield of 6.2% fully franked. At current prices, it’s operating on a moderate earnings ratio and a drop in prices looks unlikely. This year, the NAB has performed well for shareholders. A huge 22.8% rise in NPAT for the half year ended 31 March 2013, helped the share price rise by 35% for the full year. Perhaps it’s time to lock in a high-yielding, highly stable income stream.

Growth

The big banks have been competing ferociously for home loans since the GFC. Even though housing prices have remained flat in recent years, Australia has witnessed a very slight rise in financing rates. However, ANZ (ASX: ANZ) has decided that it is not going to be weighed down by domestic growth any longer.

In 2007, current CEO Mike Smith launched the ‘Super Regional Strategy’, which sought to take advantage of Asia’s rising need for finance. Since that time the potential of the strategy hasn’t been fully realised but this year is looking as though it could be the first time the strategy begins to make a profit. While some of Asia’s biggest banks struggle to remain afloat, the ANZ is prowling with healthy balance sheets and an aggressive outlook for the region. Paying a 5.1% dividend and operating at a modest share price, ANZ looks like the bank with the biggest upside.

Foolish takeaway

The recent rise in banking stocks has taught investors to buy at the right price. In May, the banks were overpriced but with the recent drop, they are more enticing. For growth stocks, investors have shown they are willing to pay extremely high prices based on expectations but since we are experiencing a slowdown in mining investment, we are also likely to witness a plateau in profits from the big four. With the exception of ANZ, I would not be paying a price of more than 11 times current earnings for any of the big banks.

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Motley Fool contributor Owen Raszkiewicz owns shares in ANZ. 

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