With juicy fully franked dividends and consistent earnings growth year-in year-out, it's no wonder so many Australian investors hold banking stocks in their individual and superannuation portfolios. Three of the best big banks are Australia and New Zealand Banking Group (ASX: ANZ), Macquarie Group Ltd (ASX: MQG) and Westpac Banking Corp (ASX: MQG). Each offer quite different growth strategies, yet all have significantly outperformed the S&P/ASX 200 (ASX: XJO) (INDEX: ^AXJO) over the past one, five and ten years.
ANZ
With a goal of deriving 25% to 30% of revenues from Asia by 2017, ANZ is the only big four bank to draw meaningful amounts of revenue from the region. With a growing market for international banking, trade flows and foreign exchange, ANZ is positioning itself to benefit from the Asian Century. So far, since 2007, its Super Regional Strategy has been well executed and in the first half of 2014 it was able to draw over 19% of FX-adjusted cash profit from the region.
With its Australian operations providing modest but healthy earnings growth, its International and Institutional Banking (IIB) and Global Markets divisions continue to grow nicely. From a valuation perspective however ANZ does trade on lofty earnings multiples and a high price to book ratio (currently 2.09), so it appears its near-term growth prospects are fully priced in.
Macquarie Group
As Australia's premier investment bank, Macquarie draws a majority of its earnings from international markets. Whilst revenue growth from the Australian market has remained largely flat over the past few years, its Asia and Americas divisions continue to show promising signs of growth.
At just over $60 per share, Macquarie trades on 14.6 times its forecast earnings per share for 2015 and a dividend yield of just under 4.9%, with partial franking. Although Macquarie's share price is very cyclical (given its dependence on investors' confidence), its current price could prove to be undemanding if it continues to grow strongly in areas such as M&A, mortgages, funds management and commodities research.
Westpac
With around 50% of the Australian mortgage market between it and Commonwealth Bank of Australia (ASX: CBA), it's fair to say Westpac is a first class Australian bank. In addition to mortgages it also holds around 19% of the business market and a 20% market share of wealth platforms. Growing its wealth management arm as well as increasing small and medium business exposure, coupled with a focus on trade flows to and from Asia will be key to its success in coming years.
The bank has a conservative balance sheet (partly due to its 23% market share of household deposits) which will allow it to pay a 5.2% fully franked dividend in the coming 12 months. It currently trades on a trailing price to earnings ratio over 15, price to book ratio of 2.28 and PEG ratio of 2.60. At current prices, Westpac is not a buy.
The BEST buy of all
Whilst I feel long-term investors could do worse than adding Macquarie or ANZ to their portfolios, I don't think they're a bargain at current prices (I sold my ANZ shares in August 2013). However, for investors looking for value, growth and income there's one ASX stock I suggest you take a look at.
