There are a number of ASX bank shares, but two of the major ones look like they could be considerably cheaper than Commonwealth Bank of Australia (ASX: CBA). I'm talking about Australia and New Zealand Banking Group Ltd (ASX: ANZ) shares and Westpac Banking Corp (ASX: WBC) shares. Which is the better buy?
Aussies have plenty of banks to choose from on the ASX, but the biggest ones have scale advantages. ANZ and Westpac may seem fairly similar. How do they compare?
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Price/earnings ratio
One of the easiest ways to compare banks is to look at the earnings multiple that they are valued at. So let's start there.
However, it's worth noting that how a company calculates its profit can be different to another. The price-to-earnings (p/e) ratio may be one of the least-bad ways to compare companies.
According to CMC Markets, the ANZ share price is valued at 10x FY23's estimated earnings. The Westpac share price is priced at 11x FY23's estimated earnings. While there doesn't seem to be much in it between the two, it's worth noting that if ANZ shares traded at the same earnings multiple as Westpac, it would rise by around 10% to have a p/e ratio of 11.
Potential FY23 dividend yield
With how large the dividend yields of both of these ASX bank shares are, the investment income could form a large part of the return in the short term.
Using the estimates on CMC Markets, Westpac could pay a grossed-up dividend yield of 8.4% in FY23 and ANZ might pay a grossed-up dividend yield of 9.2%. It seems that ANZ is expected to pay a noticeably higher yield in FY23, though the variance may largely be down to the difference in earnings valuation.
My view on which ASX bank is a better buy, Westpac or ANZ shares
I think that Westpac is the simpler and better investment choice to go for. It's looking to cut costs, which will hopefully enable an improvement in profit.
But, ANZ has a lot going on. It's investing in its new digital banking platform ANZ Plus, and it aims to enable a better offering for customers and hopefully can achieve faster loan approvals for potential borrowers.
ANZ is wanting to buy the banking division of Suncorp Group Ltd (ASX: SUN), which would add useful extra scale to its business. But, how much value will it add to the business in per-share terms? I'm not sure it's going to be as good as management is hoping, particularly in an environment where bad debts could rise due to higher interest rates.
