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Macquarie Group Ltd, National Australia Bank Ltd and Australia and New Zealand Banking Group – which bank should you buy?

This week investors have had the opportunity to review the results of three of Australia’s leading financial institutions. Overall results have been largely in line with expectations with the share prices of Macquarie Group Ltd (ASX: MQG) and National Australia Bank Ltd. (ASX: NAB) set to finish the week higher. Australia and New Zealand Banking Group (ASX: ANZ) meanwhile is set to record a minor fall of less than 0.5%.

Given the number of investors who analyse and follow the banks, the pricing of these three stocks should be reasonably efficient, making value hard to find and the relatively small adjustments in share prices post result announcements suggests this is indeed the case.

Fair multiples

Macquarie (on an annualised basis for its first half), NAB and ANZ are now trading on FY 2014 (historic) price-to-cash earnings ratios of 14.4x, 16.1x and 12.8x respectively.

Obviously, on a PE basis ANZ now looks to be priced the cheapest, however, there is a case for buying both Macquarie and NAB ahead of ANZ.

Macquarie has just increased earnings per share (EPS) by 42% compared with the previous corresponding period, although EPS did fall 9% when compared with the immediate prior half. Despite the weakness compared to the second half of FY 2014, management is guiding towards growth for the full year which suggests on a forward PE, Macquarie will be looking cheaper.

Meanwhile, NAB is expected to shortly find a solution to its problem legacy UK assets. With this underperforming division out of the way, the bank should hopefully be able to get back to basics and improve its return on equity. Like Macquarie, NAB’s future earnings look set to improve.

A Dilemma

While Macquarie and NAB both have good opportunities to improve future earnings, ANZ is not without its potential either. With the ANZ pursuing a ‘super regional’ strategy that has so far led to 24% of group revenues now being earned from the Asia Pacific, Europe and American regions, earnings growth at ANZ looks likely too.

If I could only buy one of these three stocks it would be Macquarie. The investment bank has more leverage and ability to grow earnings at a faster pace, while NAB and ANZ are more at risk from increased regulatory capital constraints.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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