5 things to look for when researching shares of ANZ Banking Group (ASX:ANZ)

Here are five things to look at if you are researching ANZ Banking Group (ASX:ANZ) shares, or a competitor like National Australia Bank Ltd. (ASX:NAB).

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 things to look for when researching shares of ANZ Banking Group (ASX:ANZ)

1. Assess management & the workplace

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 ANZ Banking Group 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.

2. Look at the banking margins

Banks like ANZ 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 Commonwealth Bank of Australia (ASX:CBA), 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 reason for studying the NIM so closely is because ANZ Banking Group earned 75% of its total income from lending last year.

[ls_content_block id=”3409″ para=”paragraphs”]

3. What’s the ROE?

Return on equity or ‘ROE’ for short compares the yearly profit of a bank against its total shareholder equity as shown on its balance sheet. The higher the ROE the better. ANZ Banking Group’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%.

4. The buffer against losses

When it comes to safety and risk management, for banks, the CET1 ratio (common equity tier one) is paramount. CET1 represents the bank’s ‘safety capital’ or ‘buffer’ to protect it against complete financial collapse. In the most recent full year, ANZ Banking Group had a CET1 ratio of 11.4%. This was higher than the sector average.

5. What are shares actually worth?

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.

And the result? 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 $19.49.

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.

[ls_content_block id=”3302″ para=”paragraphs”]

$50,000 per year in passive income from shares? Yes, please!

With interest rates UP, now could be one of the best times to start earning passive income from a portfolio. Imagine earning 4%, 5% — or more — in dividend passive income from the best shares, LICs, or ETFs… it’s like magic.

So how do the best investors do it?

Chief Investment Officer Owen Rask has just released his brand new passive income report. Owen has outlined 10 of his favourite ETFs and shares to watch, his rules for passive income investing, why he would buy ETFs before LICs and more.

You can INSTANTLY access Owen’s report — or get it emailed to you — for FREE by CLICKING HERE NOW or the button below.

Unsubscribe anytime. Read our TermsFinancial Services GuidePrivacy Policy. We’ll never sell your email address. Our company is Australian owned.

Information warning: The information on this website is published by The Rask Group Pty Ltd (ABN: 36 622 810 995) is limited to factual information or (at most) general financial advice only. That means, the information and advice does not take into account your objectives, financial situation or needs. It is not specific to you, your needs, goals or objectives. Because of that, you should consider if the advice is appropriate to you and your needs, before acting on the information. If you don’t know what your needs are, you should consult a trusted and licensed financial adviser who can provide you with personal financial product advice. In addition, you should obtain and read the product disclosure statement (PDS) before making a decision to acquire a financial product. Please read our Terms and Conditions and Financial Services Guide before using this website. The Rask Group Pty Ltd is a Corporate Authorised Representative (#1280930) of AFSL #383169.