Still, recent history suggests that in tough times, the biggest banks are the ones most likely to survive - and perhaps even thrive. That makes now a reasonable time to consider whether either of these two Australian banking titans may be a better buy than the other.
Valuation comparison
Commonwealth Bank of Australia trades at about 16 times its anticipated earnings, and those earnings are expected to grow by around annualized 2.8% over the next five years. Westpac Banking Corp trades at around 11.4 times its projected earnings, and analysts are predicting around 12.4% annualized growth over the next five years.
Based on both its lower price to projected near-term earnings ratio and its faster anticipated earnings growth, Westpac Banking Corp looks like it is the better potential value pick of the two. That said, Westpac did recently announce that it would be more flexible than current guidelines recommend when it comes to people refinancing their mortgages, given recently rising rates.
If all goes well, that flexibility will help it deliver that higher anticipated growth rate. On the flip side, though, lending standards are usually tightened in response to challenges that drive unexpected increases in defaults. If a troubled economy ultimately means higher defaults, then accepting a looser set of guidelines may end up biting Westpac in the end.
Dividend comparison
Commonwealth Bank of Australia pays its dividend twice a year. Over the past year, that dividend added up to $4.20 AUD per share. That works out to a yield around 4.2% based on the company’s recent market price. The company’s objective is to pay out between 70% and 80% of its earnings in the form of dividends . At that payout ratio, the company doesn’t really retain much to drive future growth, but then again, as the largest bank in the country, organic growth may be tough to come by.
Westpac Banking Corp also pays its dividend twice a year. Its past two dividends handed shareholders $1.34 AUD per share. Based on Westpac’s recent price, that works out to a yield around 6.4%. Westpac pays out around 72% of its income in the form of its dividend. With a payout ratio that high, it will need to deliver on its expected earnings growth in order to have a chance of increasing its payment.
Neither company tells a compelling dividend growth story, but with a larger current yield and a similar payout ratio, Westpac Banking Corp comes out a bit ahead on this front.
Balance sheet comparison
Banking balance sheets are notoriously difficult to dig through, so on that front, I’ll defer to Fitch, the ratings agency. For both Commonwealth Bank of Australia and Westpac Banking Corp, Fitch rates each of them a very strong “A+” overall. Fitch also indicates that both companies have Tier 1 capital ratios of above 11%.
That Tier 1 Capital ratio compares favorably to Australia’s minimum of 4% and the Basel III international standard minimum of 6%. While any bank that loses enough of its depositors’ confidence could face a run if things go horribly wrong, a strong rating and solid capital ratio makes it less likely that such a run will happen.
Due to both businesses having similar Tier 1 capital ratios and strong agency ratings, we’ll call it a tie between them on this measure.
One company has an edge, but the other doesn’t look too bad either
Going strictly by the numbers, Westpac Banking Company wins the comparison, thanks to its cheaper valuation, faster potential growth rate, and higher dividend yield. That said, the fact that it is willing to be more flexible with its refinancing standards is an additional layer of potential risk that investors may not want to stomach. In that case, Commonwealth Bank of Australia also looks like a reasonable stock to consider for investors looking for exposure to the Australian banking industry.
At the time of publication, Chuck Saletta did not own shares of any company mentioned in this article.
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