Australia and New Zealand Banking Group (ASX: ANZ) is the big four bank I believe is likely to outperform its counterparts in the next decade. Its Asian expansion, strong management and robust dividend make it a tempting investment, even at today’s prices.
However, before we make any investment decision, it’s imperative we look at the good and the bad and, at the moment, there are too many blemishes on the investment case.
Firstly, price is perhaps the most important consideration in any successful investor’s strategy. At current prices ANZ and its peers – Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) – occupy high valuations. As I noted earlier this week, the big banks are currently priced above their 10-year average, across a number of valuation metrics. ANZ is no exception.
Which brings me to the second reason I will resist buying this big name growth stock. Patience. With unemployment tipped to rise in the near future, a likely outcome will be a rise in bad debts. This will hinder profit which will (in theory) lead to a lower share price. When interest rates rise – and they will – it too will lead to an increased level of bad debts and, perhaps more importantly, rising rates will make high dividend-yielding stocks like the banks less appealing to safer alternatives such as bonds and term deposits. I recently heard something – which sounded absurd at the time – but makes perfect sense. It went a little something like this: If you buy bank shares at current prices you are assuming we’re not going to encounter another recession or GFC-like event. The best time to buy bank shares is when they’re cheapest. Just ask investors who bought CBA shares for $25 in 2009!
Although we’re witnessing huge payouts and gigantic profits from each of the big banks, much of this has been spurred-on by cost-cutting and technological innovation. Flexibility is what differentiates ANZ from its peers. ANZ will likely be able to leverage the growth in Asian markets against the saturated markets here in Australia and New Zealand. However, whether in local markets or abroad, competition is growing.
You don’t have to be an investor to know the big banks are competing ferociously for deposits and mortgages. This has resulted in margin pressure. The banks’ quarterly and half-yearly reports confirmed it. Net interest margins have fallen in recent years, as the property market soured and regional lenders such as Bank of Queensland Limited (ASX: BOQ) and Bendigo and Adelaide Bank Limited (ASX: BEN), coupled with mortgage brokers like Mortgage Choice Limited (ASX: MOC) and Homeloans Limited (ASX: HOM) continue to give borrowers options. Domestically focused banks appear to have more to lose than gain.
Australia’s banks are not only some of the safest in the world, but they are also the most expensive. Although there are compelling reasons to add this top-performing bank stock to a long-term portfolio, at current prices, given the low margins and headwinds in domestic markets, I’m avoiding putting my hard-earned cash into any of the banks. However, for those shareholders lucky enough to get in at low prices, why not just sit back and enjoy the big fully franked dividends?
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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.