Is Australia and New Zealand Banking Group a buy?

In the current macroeconomic environment, it mightn’t be the right time to buy big bank stocks.

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Ultimately the goal of any investment is to buy low and sell high. As seasoned investors know, it’s easier said than done.

The number-one problem for inexperienced investors or those who cannot devote days and days to researching companies in the stock market, is finding new ideas. As such, a majority of portfolios contain companies whose products or services the investor is not familiar with, so let’s take a look at Australia and New Zealand Banking Group (ASX: ANZ).

When 11% just isn’t enough

Despite announcing an 11% increase in cash profit for the 2014 half-year, ANZ is not cheap. The run-up in its share price over the past 24 months has gotten ahead of fair value, yet investors are still buying. Maybe it can continue to go higher. Maybe it won’t. Nobody knows for sure.

However just ask yourself, if it were any other company trading on 16 times FY13 earnings per share (EPS) would you be happy with 11% profit growth given the current macroeconomic trends at play? I doubt you would.

Motley Fool contributor Peter Andersen provided an apt and objective interpretation of ANZ’s recent results and, perhaps, why the market shouldn’t be as enthusiastic about the stock as it currently is.

Growth ahead

I’ll be the first to admit ANZ is the best big bank. But that’s not saying much. I believe its long-term regional exposure will differentiate it from its peers, particularly Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC). With the Asia, Pacific, Europe and Americas markets now accounting for 19% of FX-adjusted cash profit, it shows CEO Mike Smith’s Asian strategy is working.

Foolish Takeaway

Currently ANZ shares trade above their historical price-book ratio and price-earnings ratio, the bank has a falling net interest margin (a key measure of banking profitability), falling bad debts, thanks to the low interest rate environment (boosting profits) and a lower tier-1 capital ratio than it did six months ago. So although ANZ’s earnings per share could be expected to reach as high as 250 cents in FY14, giving it a forward price-earnings ratio of just 13.5, I don’t think it’s worthy of a buy rating.

Although it Asian strategy sounds promising, I believe investors will get the opportunity to buy it cheaper price in the near to medium term once interest rates and bad debts inevitably rise. As such, I’d rate it as a hold.

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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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