If you buy one bank stock make it this one

Australia’s big banks have enjoyed some fantastic gains in the past 18 months led mostly by a rush for high dividend yield by investors wanting to escape the poor returns from fixed interest securities.

With the Reserve Bank of Australia (RBA) tipped to lower the cash rate again in 2014, it’s no wonder investors are still looking to buy big name stocks. Although it probably comes as no surprise that I believe none of the banks are standout buys at current prices, investors find comfort adding them into portfolios for their perceived level of safety, which cannot be attained from other ordinary companies.

So which one would I buy? To answer the question let’s firstly take a look at what we need to consider before committing to a purchase.

When I look at dividend plays, the most important consideration must be given to the sustainability of earnings. Capital requirements are also a key factor for the big banks.

National Australia Bank (ASX: NAB) has the highest dividend yield of the big four but it also has an accident-prone history, high amounts of doubtful or bad debts and the lowest amount of tier-1 capital – as required by APRA. Although their mortgage market exposure is increasing, NAB’s not one I’m adding to my portfolio. Mortgages are a big part of bank earnings.

Although Westpac (ASX: WBC) has the second largest mortgage portfolio, its share of the market is falling thanks to a recent short term focus, whereby they kept interest rates higher than their competitors to bleed out an extra profit – not good for long term shareholders and earnings.

Although it uses a multi-branded strategy with its St George and Bank of Melbourne businesses, with its mortgage market share falling, Westpac is not a stock which I believe will outperform its peers in the long run. Broker consensus seems to concur with my forecasts and have estimated earnings to grow by a measly 5.3% this year – far from deserving of its P/E ratio of 14.

Commonwealth Bank (ASX: CBA) is a family favourite for dividends and safety. Unsurprisingly it trades on the highest earnings multiples and price to book ratio. Combined that with the lowest dividend yield and only modest forecasted growth, CBA is too expensive for me.

Last, but certainly not the least, is ANZ (ASX: ANZ). ANZ is the bank I’d buy. Compared to CBA, its profits have underperformed since the GFC but I believe it is due to its long term focus overseas. ANZ has the lowest share of the mortgage market, has the biggest overseas presence (allowing for plenty of growth potential), pays a great dividend, has a strong capital position and is forecasted to grow earnings quicker than any of its peers. Earnings are estimated to grow by around 16% in 2014 – twice as much as any of the other big banks.

Foolish Takeaway

Whilst I believe ANZ is the best bank for dividend hungry investors, I do not believe it is currently trading at the best price for buyers. In addition, it’s certainly not my favourite dividend stock.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.     

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