ANZ Group Holdings Ltd (ASX: ANZ) shares stand among some of the largest companies within the S&P/ASX 200 Index (ASX: XJO). But simply being a big business isn't enough to appeal to me.
While ANZ shares hold a sizeable weighting in exchange-traded funds (ETFs) such as the Vanguard Australian Shares Index ETF (ASX: VAS) and other popular investment funds, I'm not attracted to the ASX 200 bank share for a few crucial reasons. Let's take a look.
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Strong competition
Ideally, I want to invest in businesses with strong competitive advantages or economic moats.
Competition is stiff in the banking sector, with numerous lenders operating in Australia. On the ASX alone, we have the big players like ANZ, Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Bank of Queensland Ltd (ASX: BOQ) and Macquarie Group Ltd (ASX: MQG).
Not to mention a host of smaller lenders, including Bendigo and Adelaide Bank Ltd (ASX: BEN), Pepper Money Ltd (ASX: PPM), AMP Ltd (ASX: AMP) and MyState Ltd (ASX: MYS).
Thanks to the rise of digital banking, lenders don't need a national network to be competitive anymore. Macquarie and ING have become sizeable players without branch networks.
Loans appear to have become commoditised, so lenders have seen their margins decline. That trend doesn't seem to be reversing. Plus, mortgage brokers are now influential players in the market. In my mind, these are long-term headwinds.
In the FY24 first-half result, ANZ revealed that its net interest margin (NIM) had declined. The NIM tells us how much profit a bank makes on its lending (including the cost of funding, such as term deposits).
The ANZ NIM has declined every quarter since the start of FY23, from 2.47% in the first quarter of FY23 to as low as 2.32% in the second quarter of FY24.
High dividend yields aren't ideal for me
ANZ pays a high dividend yield, which may be ideal for some owners of ANZ shares.
However, as a full-time worker, I'm in the ATO tax bracket, where essentially a third of my additional income is lost to tax. Considering ANZ pays big dividends every year, I'd lose a fair amount of my return.
If my shares generate capital growth, they aren't taxed until the asset is sold, so that is much more appealing to me. Another benefit of capital growth returns rather than dividend returns is getting a capital gains discount if I hold for more than 12 months.
Weak earnings growth expected
I don't mind the idea of a high dividend yield if the ASX 200 share's earnings are expected to rise significantly in the next few years.
However, due to the competitive landscape and low demand for credit amid the high cost of living, I don't believe ANZ's earnings will grow much in the next few years.
The broker UBS expects the bank's FY24 and FY25 net profit after tax (NPAT) of $7 billion and $7.2 billion, respectively, to be lower than FY23's net profit ($7.4 billion) amid the challenging conditions. It might take until FY26 for ANZ's net profit to surpass FY23.
If profit isn't growing, then I don't think the ANZ share price can sustainably rise much in the next 12 months, which is one of the main reasons why I'm steering clear of buying ANZ shares.
