Is the Australia and New Zealand Banking Group (ASX: ANZ) share price a buy?
ANZ's share price has been on a bit of a rollercoaster in recent months. During the first COVID-19 share market crash it fell by 48% to $14.10 in March. It then rose 49% to peak at $21 last week. Interestingly, the ANZ share price has fallen 12% from that post-crash high last week.
ASX investors may have pushed the ANZ share price a little too far. There is certainly a lot of positive news around. Australia's coronavirus, infection numbers are very low. The cost of jobkeeper was overestimated by $60 billion, which means the economy didn't need as much support as first feared.
ASX banks like ANZ are an important part of the Australian economy. A good economy is important for the performance of the banks. The other large ASX banks of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) are also key parts of keeping Australia's economic cogs turning.
ANZ recently announced its initial estimation of the expected effects on COVID-19 on its profit. The ANZ share price has fallen so hard because of the fears about the coronavirus impacts.
In the recent ANZ half-year result the major ASX bank announced that statutory profit was down 51% compared to the prior corresponding period. The decline was driven by credit impairment charges of $1.674 billion, which included increased credit reserves for COVID-19 impacts of $1.031 billion. In that same result ANZ reported that its (continuing) cash profit dropped by 60% to $1.4 billion.
The large decline in profit and uncertainty caused by COVID-19 caused the ANZ board to defer the decision about the dividend to a later date. This may mean there is going to be a large dividend cut later, particularly as APRA wants banks to manage their capital this year.
Is the ANZ share price a buy?
The ANZ share price is currently trading at a level we saw during some parts of the GFC, though ANZ went as low as $12 in early 2009.
Warren Buffett once said some wise words for times like this: "Be fearful when others are greedy and greedy when others are fearful." The market seems to be fearful with the ANZ share price, so perhaps it is a medium-term opportunity?
However, I'm not totally convinced that it is a good opportunity. It seemed like a more obvious bet at under $15.
The RBA interest rate is now 0.25%. The lower the official interest rate, the harder it is for banks to maintain their net interest margin (NIM). Transaction accounts are a good example of this effect. Banks aren't likely to charge customers for keeping cash in the bank, so a reduction of the official rate by 0.25% means less margin for the bank if it reduces the loan interest rate for borrowers.
The dividend was an alluring reason for income-focused investors to buy ANZ shares. But it's hard to say what the bank's dividend policy will be going forward. More cash profit retained should translate into more earnings growth and a higher ANZ share price. However, large fully franked dividends are a good way to reward shareholders. It'll be interest to see what the ANZ board does.
If I were part of the bank's leadership I'd consider a 50% dividend payout ratio. That could be a fair balance between dividends and future growth.
Foolish takeaway
I don't think the ANZ share price is a bargain right now. But I don't think it's expensive either. Pleasingly, Australia's economy seems to have moved into the recovery phase now, so hopefully the worst of the COVID-19 effects has passed. However, I believe the best way to growth your wealth could be to pick shares with better growth prospects. ANZ is already a large, mature business with a big market share of the mortgage market.
