Is it time to buy Australia and New Zealand Banking Group and Westpac Banking Corp?

The share prices of Australia’s biggest banks have come under intense selling pressure since the beginning of September.

Shares in Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) have been at the front of the selloff. They’ve fallen 7.8% and 6.3%, respectively, as the S&P/ASX 200 (INDEXASX: XJO) has dropped 6.8% since the start of September.

For shareholders who decided to buy in at such high levels the looming final dividend payments will be bittersweet.

However, for potential investors, the question remains: Are they a good buy now?

I and a number of other contributors for the Motley Fool Australia warned that bank share prices were getting ahead of themselves before the September selloff.

Indeed, Westpac was one bank stock which I believed was the most overvalued. Although it has dropped modestly since then, I still haven’t changed my opinion.

Despite offering a forecast 5.6% fully franked dividend, Westpac’s current valuation is excessive. Trading on a price to book ratio of 2.16, with analyst expectations of only 10% earnings per share growth over the next three years, it would be hard for anyone to justify a ‘Buy’ rating.

I’m certainly not a buyer at today’s prices.

However, of the big four banks, ANZ is forecast to grow earnings per share at the quickest pace, as its Asian strategy continues to gain traction.

However, it too, doesn’t come cheap.

At over $31.70 per share, ANZ trades on a price to book ratio of 1.93, trailing price to earnings ratio of 14.7 and dividend yield of 5.4% fully franked.

When prices fall, I’ll be looking to add some ANZ shares to my portfolio. But at today’s prices, I’m not a buyer.

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It’s vital to look at more than just share price movements and dividend yields. If we want to consistently beat the market, it’s important to remain patient and pay a price which gives us an adequate margin of safety. Currently I don’t believe ANZ or Westpac shares are offering such a thing.

However, our top analyst Scott Phillips, recently identified one cheap but growing small-cap ASX stock which has a 6.3% grossed-up dividend yield. I think it is a STANDOUT long-term buy at today's prices. If you're interested in knowing its name, just click on the link below, enter your email address and we'll send you a FREE report on his top dividend stock idea for 2014 - 2015.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned in this article.  

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