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

In the past five trading days, shares in Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) are up 4.3% and 4.4%, respectively.

By comparison the S&P/ASX 200 (INDEXASX: XJO) is up 2.33%.

So is this your opportunity to stock-up on two high quality Australian companies, paying big dividend yields?

Westpac is our second largest bank by market capitalisation and has a rich history of shareholder returns. Indeed, over the past decade it has achieved an average annual return of 12.2%. With 12 million customers and a 23% share of the domestic property market, it’s been one of the biggest beneficiaries of booming house prices.

Looking forward, Westpac is tipped to grow earnings at less than 4% per year in the near-term and dividends will likely remain close to where they are now. This might be enough for income investors, but it’s important to note that Westpac shares do not appear cheap. At over $33, shares change hands on a price-book ratio over 2.2 and price-earnings ratio of 14. So if you want to beat the market, my advice is don’t buy it at today’s prices.

ANZ Banking Group is more of a grower than its larger peer. Indeed, its share price is up 6.7% in 2014 alone, compared to the market’s return of 5.3%.

Under CEO Mike Smith, the ‘Super Regional’ bank has a particular focus on growing its exposure in Asian markets, where it sees huge opportunities in institutional and business banking, as well as retail services.

In the first half of FY14 ANZ’s Asia, the Pacific, Europe and Americas (APEA) markets accounted for over 19% of cash profit. In addition it maintains a good efficiency ratio whilst coverage of bad loans is also good.

Of the big four banks, it has the highest net interest margin (2.15%), a key measure of profitability.

In the next three years, analysts are expecting strong earnings per share growth of around 9.1% per annum. Dividends are also expected to rise.

However like the other big banks, ANZ shares don’t come cheap. So investors must be willing to pay over two times tangible book value on a trailing price-earnings ratio of around 15.

Buy, Hold or Sell

I think ANZ will be the best big bank to hold for the next 10 years and is the only big bank which goes close to justifying its current valuation. However even it isn’t a good buy at today’s prices and investors would be wise to look for other dividend stock ideas, while they wait for a more competitive entry point.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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