Are Australia and New Zealand Banking GrpLtd (ASX:ANZ) shares too cheap to ignore? How do you research a share of a company like ANZ or National Australia Bank Ltd. (ASX:NAB) from the ground up? Below, I explain what to look for.
ANZ is a leading Australian and New Zealand banking institution, with a presence throughout the oceanic region. ANZ is one of the Big Four Aussie banks and derives much of its revenue from mortgages, personal loans and credit.
5 tips and tricks to value Australia and New Zealand Banking GrpLtd (ASX:ANZ) shares
Pay attention to culture
Culture and workplace satisfaction are more than just a ‘fluffy’ modern corporate gimmicks. Good workplace culture leads to improved retention of high-quality staff and that ultimately determines the long-term success of a company.
One way Australian investors can take a ‘look inside’ a company like Australia and New Zealand Banking GrpLtd is to use Seek company reviews data. According to the most recent data we pulled on ANZ the company’s overall workplace culture rating of 3.4/5 was above the banking sector average rating of 3.23.
Is lending profitable?
Banks like Australia and New Zealand Banking GrpLtd need debt and good margins to make their model profitable. In basic terms, a bank will take money from term deposit holders and ‘wholesale debt investors’ to lend that money out to homeowners, businesses and investors. 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. When it comes to NIMs, the wider the margin, the better.
When you’re forecasting the profits of a bank like ANZ or NAB, knowing how much the bank lends and what it makes per dollar lent is essential. That’s why the NIM is arguably the most important measure of a bank’s profitability. Across all of the ASX’s major banks, we calculated the average NIM was 2.01% whereas the bank’s lending margin was 1.76%, which highlights the bank produced a lower-than-average return from lending compared to its peer group. This can happen for a few reasons which are worth investigating.
The purpose for studying the NIM so closely is because ANZ earned 75% of its total income from lending last year.
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Return on equity or just ‘ROE’ compares the yearly profit of a bank against its total shareholder equity as shown on its balance sheet. The higher the ROE the better. Australia and New Zealand Banking GrpLtd ‘s ROE in the latest full year stood at 10.6%, meaning for every $100 of shareholder equity in the bank it produced $10.60 in yearly profit. This was over and above the banking sector average of 10.4%.
Know your downside
When it comes to safety and risk management, for banks, the CET1 ratio or ‘common equity tier one’ ratio is paramount. CET1 represents the bank’s ‘safety capital’ or ‘buffer’ to protect it against complete financial collapse. In the most recent full year, Australia and New Zealand Banking GrpLtd had a CET1 ratio of 11.4%. This was higher than the sector average.
Dividend valuations are handy (and pretty easy!)
A DDM or dividend discount model is one of the best ways to value a bank’s shares. To do a DDM we have to estimate the bank’s dividends going forward and then apply a risk rating. Using this simple DDM, let’s assume the bank’s dividend payment grows at a steady rate into the future (i.e. forever) somewhere between 1.5% and 3%. For the risk rating, we will use risk rates between 9% and 14% and then average the valuations.
So is it cheap according to our model? Our simple DDM valuation of ANZ shares is $18.20. However, using an ‘adjusted’ dividend payment of $1.20 per share, the valuation goes to $13.65. The valuation compares to ANZ’s current share price of $17.94.
Ultimately, although the shares might seem expensive using our simple DDM model, don’t make a decision based on this article. Please go away now and consider all of the risks and ideas we presented here. While you’re at it, you might also consider a diversified shares ETF, dividend fund or at least grab a copy of our free investment report below.