ANZ is our top pick in the banking sector on relative valuation grounds, trading at a material discount to peers, while offering a higher yield that compares favourably to its own historical trends, and importantly, provides a meaningful margin over 10-year bond yields.
- ANZ trades on an Est P/E 1 year forward of 12.7x, while the sector collectively trades on 17.3x. ANZ typically trades on a 12% discount, which has blown out in recent times to 25%
- Commonwealth Bank (CBA) is the well-documented outlier, and while this view is absolutely consensus, we believe it is overvalued trading on 28.5x 1 year forward (though we still hold it in the Income Portfolio).
- Inclusive of franking credits ANZ is forecast to yield 8% (assuming a conservative 73% franking which could increase), a 3.7% premium to the 10-year bond yield. By comparison, Commonwealth Bank (CBA) yields 3.85% (-0.37% v bonds), National Bank (NAB) yields 6.47% (+2.25% to bonds) and Westpac (WBC) yields 7.05% (+2.83% to bonds).
Recent data shows that credit growth across the sector remains solid at +6.7% YoY, and with underlying inflation at 2.8% YoY (trimmed mean) and the unemployment rate steady at 4.1%, the backdrop for banks is solid.
Growth across the sector is low, and we expect it to remain that way for some time. In this environment, valuations matter most. While ANZ has its challenges with the integration of Suncorp’s bank, a new CEO, and a major tech upgrade, these are also potential catalysts to see it improve performance. The share price is showing improving momentum after a period of consolidation, breaking through $29 yesterday, which is bullish. Given our positive backdrop on the market overall, targeting new highs, we can see ANZ playing some performance catch-up as the new CEO starts to deliver on operational improvements.
ANZ is our top pick in the banking sector ~$29
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