At $18, are ANZ shares finally cheap?


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It’s been a big year for bank shareholders, but none more so than ANZ Banking Group (ASX: ANZ) shareholders…

Firstly, keep in mind that its dividends were cut (“deferred”) amid the COVID-19 sell-off.

Since then, things have continued to go pear-shaped as the Australian and Kiwi economies, politicians and central bankers struggled to understand the implications of Coronavirus. JobSeeker, JobKeeper and a near $100 billion commitment from the RBA has helped.

How to analyse ANZ stock

This short article steps through three tips or tricks I’d use for analysing a bank stock like ANZ, Commonwealth Bank (ASX: CBA), Westpac Banking Corp (ASX: WBC) or National Australia Bank (ASX: NAB).

1. Employee morale

Firstly, it might seem obvious but culture is more than a modern corporate gimmick, given the increasing focus on hiring the right talent in a tech-enabled banking sector. Looking at ANZ’s Seek company reviews data, according to the most recent numbers we pulled, the company’s overall workplace culture rating of 3.4/5 is above the banking sector average rating of 3.2. That’s good.

2. Financials

On the financials, a bank will take money from term deposit holders or wholesale debt investors to lend that money out to homeowners, businesses and investors. It does this because it will earn a spread between the cost of capital and the return from lending. The difference between what a bank pays to savers and what it makes from mortgage holders (for example) is the net interest margin or NIM.

Across Australia’s eight-largest banks, we calculated the average NIM was 2.01% whereas ANZ’s NIM was 1.76%, meaning it produced a lower-than-average return from lending compared to its peer group. This can happen for a few reasons which are worth following-up. It’s important because ANZ earned 75% of its total income just from lending.

Return on equity or ‘ROE’ compares the yearly profit of a bank against its total shareholder equity as shown on its balance sheet. It’s another very popular metric amongst bank analysts and investors. ANZ’s ROE in the latest full-year stood at 10.6%. This was higher than the banking sector average of 10.4%.

Finally, as we’ve discovered recently with the cuts to its dividend, when it comes to safety and risk management, for banks the CET1 ratio (common equity tier one) is paramount. CET1 represents a bank’s buffer against financial ruin. In the most recent full year, ANZ had a CET1 ratio of 11.4%. This was higher than the sector average and I think it’s probably above APRA’s (the regulator) ‘unquestionably strong’ level, for now at least.

3. Valuation

I think dividend discount models are one of the best tools to value a bank share. To do a DDM we have to estimate the bank’s dividends going forward and then apply a risk rating.

My simple DDM valuation of ANZ shares is $18.20, using last year’s dividend payments. However, using an ‘adjusted’ dividend payment of $1.20, which reflects the recent cut to dividends plus my guess that it resumes its dividend payments next year, the DDM valuation falls to $13.65. The valuation compares to ANZ’s current share price of $18.56.

Buy, Hold or Sell?

Ultimately, although the shares might seem expensive using my simple DDM model, don’t make a decision based on this article. Take your time now and consider all of the risks and ideas I presented here, and read the latest annual report and management announcements.

While you’re at it, you might also consider a diversified shares ETF, which might be a better option for defensive income over the next 10 years, or take a moment to listen to my podcast below, in which I talk about one of my favourite ASX shares right now.

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Disclosure: at the time of publishing Owen does not hold a financial interest in any of the companies mentioned.

Owen Raszkiewicz

Owen Raszkiewicz

Owen is the Founder of Rask Australia, Lead Investment Analyst for Rask Invest, Head Educator at Rask Education, and Chief Banana peeler for two rabbits.