Which Bank? That old chestnut……..

The past couple of weeks has signaled the completion of annual reporting for Australia’s big four banks with ANZ, Westpac and National Australia Bank all providing their 2012 financial results.  Commonwealth Bank reported their results in August.

It is a good time to review and compare some of the metrics on the big four banks.


Return on Equity
An important component of our valuations is a business’s return on equity. The 2012 financial year results show a larger divergence in profitability than in recent years.

Company Code Return on Equity
Commonwealth Bank CBA 18.7%
Westpac Bank WBC 16.2%
ANZ Banking Group ANZ 15.6%
National Australia Bank NAB 14.3%

Risks in the Banking Sector

One risk to each of the big four banks is an increase in bad and doubtful debts. NAB fired the first shot by highlighting an increase in the risks of non-conforming loans that cause these bad and doubtful debts. During the GFC, the banks “drip fed” this unfavourable information gradually to the market. The risk is that where there is smoke, there is fire and this could be the start of an increase in bad and doubtful debts not just from the NAB but from all four banks.

A second risk is that there has been a theme of slowing growth for new loans amongst the big four banks which could limit growth in the coming years. Confirming this is that the majority of growth in profit is due to a focus on reducing operating costs across the banking sector.

Are any of the banks trading at a bargain price?

Company Rank 2012 Actual Valuation Today’s Share Price Margin of Safety 2013 Forecast Valuation 2014 Forecast Valuation
ANZ Gold 2 $23.36 $24.45 1% $24.64 $25.99
WBC Gold 2 $22.51 $25.35 -3% $24.54 $25.36
CBA Gold 2 $50.20 $59.40 -14% $52.27 $54.67
NAB Gold 3 $25.49 $23.64 10% $26.40 $27.45

*Please note that forecast estimates of intrinsic value are subject to change on a daily/weekly basis.

Commentary and corresponding 12 month share charts
Commonwealth Bank is the clear stand out from a pure profitability view point. CBA purchased Bankwest cheaply during the GFC which has provided a nice tailwind to their ongoing earnings.

Westpac is continuing to perform with its two brand strategy ie Westpac and St George.

ANZ looks likely to continue growing with its expansion into Asia.

NAB’s poor result is predominantly due to the highly publicised poor results coming out of their UK division.

An Investor’s Quandry
Is it better to own a great business at a fair price (ANZ, CBA, WBC) or an average business at a cheap price (NAB)?

I know what Warren Buffett and Charlie Munger think.  What do you think?


This article is published by Dean Mico.

Disclosure: Dean Mico does own shares in Commonwealth Bank.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

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