If you're an Australian investor looking for 20% annual returns from your stock portfolio, you shouldn't even consider our big bank stocks, especially at today's prices.
Just think about it for a second. If Commonwealth Bank of Australia (ASX: CBA) – a $131 billion company at today's prices – grew at 20% per year for the next five years, it'd be more than a $300 billion company.
However, if you want reasonable growth, or at least a regular fully franked income then the banks are worthy of your consideration – provided you buy them for the right price.
Australia and New Zealand Banking Group (ASX: ANZ) is my pick of the big four because it's most highly leveraged to growth throughout Asia. Without the ability to consolidate smaller banks, all of the major institutions will have to look offshore if they want to grow at the same pace, in the next decade, as they have done in the past two decades.
ANZ, our third-largest bank by market capitalisation, pays a better dividend than CBA and derives around 19% of cash profits outside Australia and New Zealand.
Is it a good bank?
There are many different ways to value banking stocks and I believe ANZ has a number of promising and easy-to-understand metrics to look at. ANZ's coverage of bad loans, common equity tier 1 ratio, net interest margin, return on equity and efficiency ratio are all in good shape.
Valuation
In times of distress, bank stocks are valued by their price-book ratio (P/B), but in a bull market they're loosely priced off earnings per share by looking at the price-earnings (P/E) ratio. Purchasing bank stocks with a P/B ratio close to or below one is good (for Australian banks). ANZ's P/B ratio is 2.05 and price-to-tangible book ratio is higher again, neither are promising figures.
Buy, Hold, or Sell?
ANZ is a great bank because it boasts good efficiency and profitability, however like all of its peers it is not a good buy at today's prices. Wait until we encounter a credit crunch (like the GFC or similar) and you'll find P/B ratios creep a lot closer to (if not below) 1.00. Dividends will be beyond 10% (when franking is considered) and P/E ratios will fall below 10.
