The Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price is in the green today, up 0.47% to $25.65 per share.
That will be welcomed by shareholders who've watched the big bank slide this calendar year. The only of the big 4 to be in the red year-to-date.
The Commonwealth Bank of Australia (ASX: CBA) share price has gained 4.0% in 2022; the National Australia Bank Ltd (ASX: NAB) has gained 8.1%; and Westpac Banking Corp (ASX: WBC) shares are up 11.1% year-to-date.
As for the ANZ share price, it's down 8.3% this year.
With shares slipping, ANZ is also trading at the lowest price to earnings (P/E) ratio of any of its peers.
ANZ trades at a P/E ratio of 11.9 times.
By comparison, NAB trades at a P/E ratio of 20.5 times; Westpac trades at a P/E ratio of 14.6 times; and Australia's biggest bank, CBA, trades at a P/E ratio of 2.5 times.
Then there's Macquarie Group Ltd (ASX: MQG), which trades at a P/E ratio of 14.5 times.
So, is this big discount in the ANZ share price justified?
Keep a sharp eye on the bank's operational performance
For some insight into that question, we defer to Joseph Koh, portfolio manager at Schroders.
Speaking to Livewire, Koh said that overall, the Aussie banking sector "is not particularly cheap". He pointed out that banking counterparts in the United Kingdom trade of absolute P/E multiples of roughly half the Aussie banks.
He said that due to divergent performance between the big banks "the split between the higher-rated CBA, Macquarie and NAB against ANZ and Westpac is as large as it has ever been".
Koh pointed out that only a few years ago, NAB shares were in a similar position to the discounted ANZ share price today:
Ross McEwen has done a wonderful job of restoring NAB's fortunes in the three years since his appointment as CEO.
However, it is telling that the turnaround in performance and multiple has occurred in this relatively short timeframe, with NAB being the lowest-rated major bank when he joined. This position is currently assumed by ANZ, with their discount to the sector peers being as large as that of any major bank through recent decades.
Why has the ANZ share price come under pressure?
ANZ is struggling to match its competitors.
According to Koh:
Operationally, ANZ is currently in a world of pain, with domestic market share losses in mortgages arising due to cumbersome systems and processes, and poor productivity; almost the identical set of issues which confronted NAB three years ago.
He credited NAB's rapid upwards rerating on its simplifying processes "especially those related to mortgage processing", adding that "leadership matters, a lot, even in sectors that are superficially commoditised".
What could shareholders expect if ANZ lifts its game?
Koh stresses there are no guarantees, but should the bank get its operational performance back on track, there could be some big upside for the ANZ share price.
"Should ANZ restore its operational performance to NAB's level and be rerated accordingly, there is a 40% relative performance prize on offer on a price to book basis, or circa $30 billion in market capitalisation," he said.
Koh added:
We are not assuming this occurs, and nor do many, given ANZ is trading at its largest discount to its peers in 15 years.
However, nor were many assuming it for NAB three years ago, before the rerating which delivered $35 billion in relative alpha for NAB shareholders. For this reason, any improvements in ANZ's operational performance warrant close attention.
ANZ share price snapshot
The ANZ share price is down 10% over the past year, compared to a 1% 12-month gain posted by the S&P/ASX 200 Index (ASX: XJO).
