Ask any investor and they'll tell you the best time to buy shares is when they're cheap. Buying low and selling high is the simple strategy which many successful long-term investors have employed to grow their wealth. But its easier said than done and it's very difficult to know what to buy or sell and when.
For example, buying into Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB), Westpac Banking Corporation (ASX: WBC) or ANZ Banking Group (ASX: ANZ) 5, 10 or even 20 years ago has proven to be extremely rewarding, but is it reasonable to expect more of the same in coming years?
With interest rates near all-time lows and businesses laying off workers left, right and centre, it could seem Australia's economy has taken a turn for the worse. After 20 plus years of solid economic growth, fuelled by both a housing and mining boom, now could be the time to sit back and consider the viability of the big banks' "Too Big to Fail" status.
As seasoned investors have pointed out, big bank shares are now priced as though low interest rates (which fuel demand for dividend stocks) can and will continue long into the future. However interest rates will rise, bad debts will increase and bank share prices will be put under pressure.
But what about ANZ?
Of all the big banks, ANZ is by far the most attractive to investors looking for exposure to Asia's growing middle class. With its Super Regional Strategy beginning to show excellent signs of growth, it appears CEO Mike Smith's visionary management is finally on display for all to see.
Despite being quite bullish on the bank in the long-term, I sold my shares in late 2013 because I felt the price got ahead of its earning potential in the near-term, putting its lofty valuations at risk. In the past 8 months shares have climbed over 10% higher and, in its most recent half-year, profit was up 11%.
Think I'm kicking myself?
Think again.
Alarmingly in recent years, provision charges for bad debts have sunk (by as much as 12% in the most recent half) and its enviable Net Interest Margin (NIM) has fallen to just 2.15% – approaching its GFC lows of 2.01%. In its 2014 half-yearly report, its allowance for bad debts stood at $528 million, down 12%.
For comparison, between 2007 and 2008 provisions for bad debts increased from $522 million to $1,948 million and it share price fell by around 60% between late 2007 and early 2009.
So, in my opinion, now isn't the time to be buying shares in ANZ. Although cash profit is rising and dividends are increasing, I believe they're being prodded higher by falling provision charges and investors' insatiable demand for dividend yield and a high level of perceived "safety" whilst interest rates are low.
