Australia's big 4 banks have proven to be extremely rewarding investments over the past 20 years. From humble beginnings, they now account for an incredible 30.19% of the S&P/ASX 200 (ASX: XJO) (^AXJO).
While National Australia Bank Ltd (ASX: NAB) has been a serial underperformer, the share prices of both Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) have outperformed the index over the past 1, 5 and 10 years – Even before dividends are taken into account!
But whether, or not, they'll continue to outperform the market in the next 10 years is yet to be seen. Let's take a quick look at which company is most worthy of your investment dollars.
| Name | Westpac Banking Corp | ANZ Banking Group Limited |
| Stock ticker | ASX:WBC | ASX:ANZ |
| Recent share price | $33.78 | $32.71 |
| Market Cap | $106.5 billion | $90.9 billion |
| Price-Earnings Ratio | 10-year Average | 14.53 | 12.95 | 14 | 12.4 |
| Dividend Yield | 5.2% | 4.9% |
| Price to Book ratio | 2.29 | 2.02 |
| Net Interest Margin | 2.11% | 2.15% |
Data sourced from Morningstar
As can be seen in the table provided Westpac is a larger bank. It derives a big proportion of its earnings from the Australian mortgage, credit card and personal loan markets. It has increased its exposure through the use of its various brands including BankSA, Bank of Melbourne and St.George.
It, like each of the big banks, trades on higher-than-average price-earnings and price-book multiples and recently reported a lower Net Interest Margin (NIM) than the prior period. However Westpac maintains the highest APRA Basel III common equity tier 1 capital ratio of any of the big banks (currently 8.83%) and has the lowest cost to income ratio (currently 41.20%). This enabled it to offer a "special" or once-off dividend payment in 2013.
ANZ, on the other hand, has the lowest APRA Basel III common equity tier 1 capital ratio (currently 8.33%) and has a cost to income ratio of 44.30%. However ANZ trades cheaper on book value and notched-up superior cash earnings increases in the most recent half-year as its 'Super Regional Strategy' began to show its true colours.
Led by CEO Mike Smith, it currently has the smallest market share of mortgages of the big banks but remains the most efficient lender based on its net interest margin. In addition ANZ has the fastest growing overseas earnings of the big banks and its Asia, Pacific, Europe and Americas markets accounted for 19% of group revenues in the first half of 2014 – management's goal is for that figure to reach between 25% and 30% by 2017.
The best choice for your portfolio
Although ANZ and Westpac are both quality companies, their share prices have become quite rich and, in my opinion, neither are a standout buy at current prices. In the future if prices drop significantly, look to add ANZ for growth and Westpac for safety.
