Is it time for me to change my tune about ANZ shares?

Have I underrated this ASX bank share?

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ANZ Group Holdings Ltd (ASX: ANZ) shares have been on an excellent run for shareholders. They have risen 10.6% this year and 17.7% in the last three months. That compares to a 1.5% rise for the S&P/ASX 200 Index (ASX: XJO) this year and 8.7% over the past three months.

The ANZ share price performance has surprised and impressed me. Should I be more optimistic about the bank?

Reasons to be optimistic about ANZ

An ASX bank share — or any share, for that matter — that delivers good returns, is a good thing for shareholders.

Investors appear to be more confident lately about the economic situation in Australia. Inflation is slowly but surely coming down, which is raising the prospect of interest rate cuts starting this year.

Lower interest rates would reduce the risk of too many borrowers going into arrears and could also increase demand for credit.

ANZ Bank has received approval to buy the banking division of Suncorp Group Ltd (ASX: SUN). This will boost the scale of ANZ's operations and allow it to compete more strongly in Queensland.

On the dividend front, the ASX bank share is expected to pay an annual dividend per share of $1.62 in the 2024 financial year, which translates into a grossed-up dividend yield of 8%.  

Reasons to stick with my opinion

The ANZ share price has done well, but according to Commsec, its profit is still expected to fall in FY24 (and FY25) amid strong banking competition and the likely rise of arrears.

If profit goes down and the ANZ share price goes up, it suggests its price/earnings (P/E) ratio is increasing, and the company is becoming more expensive.

I think a business needs to demonstrate evidence of increasing profit potential to justify a higher share price, which could be a while away. I'm not convinced that ANZ's recent rise correlates with an improvement in its profit outlook.

ANZ shares have done well in the last few weeks and months and I'm not saying the bank is a terrible business. But I believe there are other ASX shares that can deliver stronger returns over time.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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