Australia & New Zealand Banking Group: Strong Balance Sheet Makes This Bank a Buy

No one has a lock on all the best ideas. I consider it a great honor to exchange our publication, Investor's Edge, with many other colleagues who publish financial letters, and to debate, discuss, and do my own research on ideas they originally uncover. When I do so, I give them full credit, of course. It's the same with my contacts from the military, the Intelligence Community, and the State Department. Over my lifetime, I've served in a number of foreign locations and have much respect for the officers and NCOs, the collectors and analysts, and the ambassadors, consuls and embassy personnel who typically learn far more about the real on-the-ground situation with foreign firms and foreign politics than any journalist can in a two-week visit.

The company I am reviewing today comes from one such individual who has requested that he not be named. His current professional duties preclude him from taking credit for his research and insightful thinking so I'll have to be content with passing along your thanks if this one works out well for you!

I am unwilling, in these days of a mid- to long-in-the-tooth bull rally in a bear market, to buy anything that isn't down 50% from its 2008 high and yielding at least 8%. So many potential situations like this exist that we can afford to be both picky and choosy. I think one such opportunity that I won't mind selling part of if it appreciates 50% in a few weeks -- and I won't mind holding for what I believe is a solid balance sheet and 8% dividend if it doesn't move that quickly -- is Australia & New Zealand Banking Group Ltd. (ANZBY.PK). I can't ascertain, and therefore guarantee, that every shoe has dropped in Australia any more than I can here in the U.S. But with the spotlights directed at all banks worldwide, I'm pretty sure we now know what we did not know 6 months ago: where at least most of the bodies are buried in banks' balance sheets!

As a primary exporter of raw materials like coal, aluminum, copper, agricultural products, platinum, and gold, Australia has suffered mightily as commodity prices plummeted during this recession. Loans that were less-than-stellar had to be written off, mortgages that were not ever going to be paid were foreclosed upon, capital placed at risk on foreign shores was repatriated, etc. And with all that happening, banks like Citicorp (C) and Bank of America (BAC) were shown, like the emperor, to have no clothes.

ANZBY? To conserve cash, it cut its dividend by one-quarter and expects only a flat comparison in 2009 with (fiscal year ending 30 September) 2008 results. Of course, "flat" would mean that ANZBY would still make, in profits, A$3 billion (about $2 billion US) in profits in fiscal 2009, now exactly half over.

In addition to finding a bank selling at half its 2008 high, yielding 8%, and having survived having the kitchen sink and its contents thrown at it, I like ANZBY for its forthrightness, the strong and transparent governance structure in democratic and (mostly) capitalist Australia, and its war chest and continued earnings flow at a time when others are contracting. In fact, ANZBY employs over 3,000 people at its technology and back-office center in Bangalore, India, and has made no secret that it wants to create a "super-regional" triangle of quality banking between Australia/New Zealand, India and China. To that latter end, the company just announced that it plans to incorporate locally in China and open another 20 banking outlets in the country. While others are licking their wounds and retrenching their operations, ANZBY is slowly (20 branches slowly) pushing forward with its expansion plans. Having money when others don't, in order to gain market share, is a Good Thing. Just ask Warren Buffett.

ANZBY's CEO seems to know where future savers and borrowers -- and thus deposits and lending -- are going to live, work and invest. He says, "With the significant slowdown in the U.S. and European economies, the importance of China and Asia to the future of the world economy is now more obvious than ever." With its extensive experience in the Australian agricultural sector, I see ANZBY as a natural fit in rural China, at a time and place where the Chinese government is desperate to initiate rural reform. It's not as if the leadership at ANZBY are wide-eyed babes in the woods as they stick yet another toe into China. They already hold a 20% stake in two Chinese banks, the Shanghai Rural Commercial Bank and Bank of Tianjin. Finally, with cash in the till, I wouldn't be surprised to see ANZBY pick up some US or European banks' Asian operations for next to nothing. If I had to hazard a guess, HSBC (HBC) and Royal Bank of Scotland (RBS) might come to mind...

Disclosure: Long US-traded shares of ANZBY. Have an open order to buy more if it breaks 10. Will consider selling at 15 if it has a short-term run, but will then buy it back during the Dog Days of Summer.

Comments

[Just an inv...:]

"They already hold a 20% stake in two Chinese banks, the Shanghai Rural Commercial Bank and Bank of Tianjin. "

I am based in Hong kong. We got many China financial news but frankly, I have never heard of those 2 banks..

Mar 31 07:26 AM

[j_remington:]

The timing of the release of this article is suspect. A month ago the stock price was 37% cheaper.

Mar 31 09:45 AM

[Fabien Hug:]

I agree on the Australian play; country is well managed and full of commodities. AU$ is much higher than at the beginning of the year but it's still a good diversification from US$ for part of your holdings.
As an investment I prefer IAF (open end fund on the whole AUS market) and it pays a good dividend.

Mar 31 03:39 PM