This article will focus on why Australian banks present a better opportunity than American banks at the present moment. To start with, I will say that I have been a naysayer on buying American banking stocks for a while, and I have been proven wrong. The stocks have rallied hard along with most sectors and investors who had the nerve to stay committed did quite well, although it has been a very rocky road in financials over the past 2-3 years. However, given that, the Australian economy and banking sector have also done very well during the same time period, and I believe they possess less risk going forward.
Going back a few years, Australian banks were less exposes to the debt crisis in Europe than both American and European banks. When the recession hit, these banks actually stayed profitable and wrote down far less in under-performing loans. Australian banking stocks certainly took a hit along with everything else, but important legacy effects remain. For one, their banking sector is not as heavily regulated. Also, there is a persistent fear in the U.S. that additional regulation is necessary, which is not occurring to the same degree in Australia.
I will now compare two U.S. banking stocks to two Australian ones -- Citibank (C) and Wells Fargo (WFC) to Westpac Banking Corporation (WBK) and Australia and New Zealand Banking (OTCPK:ANZBY). My main focus is on dividend paying stocks and risk aversion. The following facts will demonstrate why Australian banks are the better choice presently.
As I mentioned, all four of these stocks prices were hit hard during the recession. How they recovered is where the differences lie. To start, prior to the recession C was paying a dividend of $3.2 that yielded over 6% annually. In '09 it was dropped to $.10/share and was then discontinued. It was not reinstated until May '11 at $.01/share and that is where it sits today, yielding .09% for investors. WFC also dropped its dividend from $.34/share to $.05/share and did not start paying a meaningful dividend until May '11. Currently, the dividend sits at $.30/share yielding 2.66% annually.
In comparison, during the recession WBK was still paying a dividend that yielded over 5%. While it did drop during that time period, the company has raised its dividend every year since, and including '09. That demonstrates a more resilient balance sheet than its American counterparts. The dividend currently is $4.37/share and yields just under 5%. It is important to point out that Australian companies pay their dividends semi-annually which is one reason why the payouts individually are larger- investors receive them only twice a year as opposed to four times in America.
ANZBY's dividend did drop about 40% during the 2008-09 period. However, by 2010 it was paying a dividend that was higher than before the crash, and today it pays a dividend of $.83/share that also yields just under 5%. This payout is 43% higher per share than prior to the crash.
The takeaway here is that Australian banks were stronger during the crisis. They did not have to cut out dividends to the extreme that our American banks did, and were able to reinstate them to even higher levels much faster. While WFC has gotten back to a level before the crash, it took much longer. Also, the yields are much higher on WBK and ANZBY, so that is clearly more attractive for dividend investors.
I also think that the Australian economy presents less of a immediate threat. The current U.S. unemployment rate stands at 7.6%, while in Australian it is 5.6% (as of April '13). A lower unemployment rate usually indicates higher consumer confidence, higher spending, and higher wages, all of which contribute to inflation which is positive for stocks. Coupled with less regulatory pressure, I think the Australian banking sector presents a less cloudy future.
Finally, Australian banks are better supported by their earnings at the moment. C's PE is 18, while WFC trades at 11. In comparison, WBK has a PE of 16 and ANZBY's is 14. To me, C represents a very unattractive option because its dividend is insignificant and it trades at a higher multiple than its peers. While WFC is cheaper than its Australian competitors, I feel that the Australian banks are worth paying a higher price for because their dividend payouts are larger. Coupled with the fact that China is one of Australia's biggest trading partners and Australia's proximity to the rest of Asia well positions the country to benefit immensely if growth continues in that region.
The bottom line is, all four stocks have performed well over the past year. However, long-term investors in American banking stocks can take little comfort in that. Over a five year period WBK and ANZBY have returned roughly 60% each while WFC has returned about 35% during the same period and C is down significantly. Our focus should be on long-term appreciation, not short-term trends. The legacy here is that Australian banks have proven themselves to be more reliable investments.