Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) are renowned for huge dividends and consistent earnings growth. It's no wonder why.
In the past decade, each have returned over 85% in capital gains and paid fully franked dividends every year. As a result, shares in both banks now trade at all-time highs.
However inflated house prices and sluggish consumer confidence continues to put a dampener on their future earnings growth. Let's take a look at each bank and see what they have to offer new investors.
ANZ Banking Group
ANZ is Australia's leading regional big bank. Whilst other banks may be concerned about slowing house prices, its exposure to Asia remains a key priority for earnings growth. However that doesn't mean ANZ neglects its Australian markets. It remains one of the most efficient lenders in the local economy and in the most recent half-year, had a net interest margin of 2.48% across Australian operations. This compares with National Australia Bank Ltd's (ASX: NAB) 1.63%.
As noted earlier our third biggest bank has its sights set on deriving a growing proportion of earnings from overseas markets. Currently they account for around 19% of FX-adjusted cash profit.
However despite the likelihood of ANZ growing faster than its peers, I believe ANZ is fully valued at current prices. It trades above its historical averages across a number of valuation metrics. Investors should adopt a wait-and-see approach and look to buy it during periods of significant economic stress – when bank shares are usually dumped by the market. In the meantime you could look for other high-yielding opportunities (more of that below).
Westpac
Amongst the big banks, Westpac is the most prepared for APRA's 2016 minimum tier-1 capital requirements. Its foothold in the Australian mortgage market has enabled it to grow profits strongly as house prices soared over the past two decades. It also has a large market share of personal loans and credit cards.
Like ANZ, Westpac offers a stellar dividend yield. Currently 5.2% fully franked. In addition to Wealth Management, it too has a focus on growing revenues from Asia but both growth areas aren't being pursued nearly as well as ANZ's Super Regional Strategy.
For safety and income during a period of low interest rates, many investors have chosen either Westpac or Commonwealth Bank of Australia (ASX: CBA) as their preferred exposure to Australian shares. As a result, both trade on hefty valuations. Westpac currently trades on a price to book ratio of 2.3 and a trailing price-earnings ratio of 15.4! For a stock which is expected to grow earnings at only 8% this year and less than 5% in coming years, investors would be overpaying at current prices.
The BEST investment of all
For investors considering buying bank shares it's important to remember that patience doesn't lose us money. I said it before but I believe, in coming years, the banks will produce less than satisfactory earnings growth. I'm not alone. Sometimes that's ok but when their share prices are riding at all-time highs, it definitely makes for a tough investment case.
However with over 2,000 companies listed on the ASX, there's a heap of rock-solid dividend paying companies still available at great prices. You don't have to settle for anything less than a bargain.
