The Big Four’s Best…
The Big Four banks feature prominently in many investors’ portfolios, typically because financials account for over 40 per cent of the Australian share market, coupled with their attractive dividends. At Montgomery, we focus on a company’s growth prospects rather than yield, which is the reason we hold ANZ in the Funds.
ANZ has released its half-yearly results to March 2014. Cash profit for the period was $3.5 billion, an increase of 11 per cent on the March 2013 half year. While the bank’s margins remained relatively flat, it demonstrated strong growth in lending and transaction volumes. It also benefited from a favourable credit environment, with credit impairment charges falling by 12 per cent.
It was pleasing to see solid growth achieved across every segment. Cash profit in Australia grew by 5 per cent, driven by above system home loan growth and strong growth in Small Business Banking.
The International and Institutional Banking division increased cash profit by 9 per cent on a currency adjusted basis, demonstrating the progress of the bank’s Asian strategy. While volume growth was good to see, the net interest margin for the division declined by 10 basis points to 1.55 per cent as competition impacted.
Cash profit from New Zealand grew by an impressive 23 per cent on a currency adjusted basis. This was due to a disciplined cost reduction program involving the migration to a single brand and technology platform. The division also benefited from above system growth in mortgages and a reduction in credit impairment charges.
ANZ generated a return on equity (ROE) of 15.5 per cent during the period and is targeting an ROE of over 16 per cent by 2016. A rising ROE is a key determinant of a company’s ability to deliver long-term value to shareholders.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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jeffrey poon
:
Thanks for the article Ben.
A question in my mind for a while now is the appropiate method for valuing financial instituations, especially considering factors such as default rate, systemic risk (which was obviously the one number that brought on the GFC) etc.
Maybe a future article on valuing banks and insurance?
Roger Montgomery
:
Good idea. Normally we apply the idea of profitability of equity. With banks one can consider the return on assets and by extension, return on tangible equity. here’s what Buffett said on CNBC March 4, this year (2014). “David perkins, wrote in to know if Buffet could comment on the banks. Specifically those trading below tangible book value like bank of america, and citigroup. what’s it going to take for these large banks to get above book value like their peers at wells fargo, ubs and jpmorgan? BUFFETT: Well, a bank that earns 1.3 or 1.4% on assets is going to end up selling above tangible book value. if it’s earning 0.6% or 0.5% on asset it’s not going to sell below book value. Book value is not key to valuing banks. earnings are key to valuing banks. And, you earn on assets. Now, it translates to book value, because to some extent, because you’re required to hold a certain amount of tangible equity, compared to the assets you have. but you’ve got banks like wells fargo, and ubs, that earn very high returns on assets, and they at a good price to tangible book. you’ve got other banks like maybe the two you mentioned, that are earning lower returns on tangible assets, and they’re going to sell for less.”
You might also like to read: Our piece on how to value a bank: http://rogermontgomery.com/a-quick-way-to-analyse-a-bank/
…and our piece on insurers, with QBE as the muse, back in 2012 http://rogermontgomery.com/is-it-time-to-buy-qbe/
Paul Audcent
:
Perhaps the NZ increase for ANZ was also in part due to the increase value of the NZ dollar versus the OZ over the past few months!