Bank of Queensland Limited (ASX: BOQ) released a solid set of first-half numbers yesterday, reporting a rise in cash net profit after tax (NPAT) of 7 percent, translating to a 5 percent lift in earnings per share (EPS). Its strong results were driven by maintenance of its net interest margin (NIM) ? the money banks make between lending and borrowing ? at 1.97% and an average return on equity of 10.5%.
The sound results from Bank of Queensland indicate the operating environment isn’t as bad as feared, making me turn my attention to the big four banks ? Australian and…
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Bank of Queensland Limited (ASX: BOQ) released a solid set of first-half numbers yesterday, reporting a rise in cash net profit after tax (NPAT) of 7 percent, translating to a 5 percent lift in earnings per share (EPS). Its strong results were driven by maintenance of its net interest margin (NIM) – the money banks make between lending and borrowing – at 1.97% and an average return on equity of 10.5%.
The sound results from Bank of Queensland indicate the operating environment isn’t as bad as feared, making me turn my attention to the big four banks – Australian and New Zealand Banking Group Limited (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC). With their respective share prices in correction territory (defined as at least a 10% fall in six months), I believe it is time to consider buying the big four banks.
Here are my top two big-four bank picks at current prices:
ANZ Bank has been on the nose of late, following its announcement of a $100 million increase to its bad debt provisions as a result of its exposure to the resources sector. Alongside its ongoing High Court appeal in the class action for unfair fees on credit cards, ANZ Bank has endured a tough few months and the market has punished its share price indiscriminately.
ANZ currently trades on a price-to-book ratio of about 1.2 and provides a generous trailing dividend yield of almost 8% fully franked. This makes it cheapest on these metrics, compared to the other big four.
In its first-quarter update, ANZ reported a very respectable NIM of 2.04% indicating solid margins despite difficult trading conditions. Although the recent announcement is likely to place pressure on margins, these issues are likely to be temporary, thus its current price provides great value for long-term investors in my opinion.
Commonwealth Bank is the gold standard of Australian banking. With a massive market capitalisation of $122 billion, Commonwealth is the largest stock on the ASX, making it a hard one to look past when it comes to picking stocks for your portfolio.
Of course, Commonwealth Bank has its own problems being involved in fresh bribery allegations within its insurance division, whilst also trying to rectify its financial planning scandal from last year, both of which could affect its brand perception in the market.
Nonetheless, CEO Ian Narev remains focussed on maintaining business momentum with Commonwealth’s first-half result demonstrating just that. Like Bank of Queensland, Commonwealth maintained its NIM in the first half at 2.06%, whilst generating an industry-leading return on equity of 17.2% (which was down 140 bps due to its mammoth $5.1 billion capital raising conducted in the first half).
At current prices, the bank pays a trailing fully-franked yield of approximately 5.9% (8.4% gross of franking credits), providing a stable income stream for the income-focused investor. Although concerns around its dividend viability have surfaced, I expect Commonwealth Bank should be able to maintain the payout amount given its strong cash generation (though it might decrease its payout ratio as a percentage of profits to comply with additional APRA requirements).
Whilst capital appreciation to its share price is subject to Commonwealth Bank continuing to grow profits, Bank of Queensland’s results demonstrate that banks continue to churn along in the current climate. By being Australia’s largest lender, Commonwealth Bank appears best placed to grow if and when the tide turns, meaning its shares should continue to do well provided no further deterioration occurs to market conditions. Whilst a housing correction could impact profitability, Commonwealth’s CET1 ratio of 10.2, stringent lending policies and geographically diverse borrower base should allow it to navigate short term difficulties and come out largely unscathed.
It should be noted that Australia’s big four banks account for almost half the S&P/ASX 200 Index (ASX: XJO). Accordingly, any diversified portfolio should include some exposure to the big banks, to some extent. Despite this, investors shouldn’t rush to purchase these banks at any price as they are not immune to falls; the last six month is testament to this.
Nevertheless, the current prices of ANZ Bank and Commonwealth Bank appear to compensate investors sufficiently for their respective risks, making now a great time to buy these Australian icons for the long-term.
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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.