Imagine a small town with only four grocery stores. They aren't in a daily price war to destroy each other. Instead, they've settled into a comfortable, highly profitable co-existence. They know that if they all act rationally, they can each maintain healthy profit margins for decades. In essence, that's the Australian banking sector, and ANZ is one of those four big “grocery stores” of money. The Australia and New Zealand Banking Group Limited, universally known as ANZ, is one of the “Big Four” banks that dominate the Australian financial landscape, alongside Commonwealth Bank (CBA), Westpac (WBC), and National Australia Bank (NAB). These four institutions are so entrenched in the country's economy that it's nearly impossible to live in Australia without interacting with at least one of them. At its core, ANZ does what banks have done for centuries: it operates a business of “borrowing short and lending long.”
The difference between the interest it earns on loans and the interest it pays on deposits is the bank's primary source of profit, known as the Net Interest Margin. Think of it as the bank's fundamental profit margin on its main product: money. Founded in 1835, ANZ has a long and storied history, growing through a series of mergers and acquisitions to become the banking behemoth it is today. While its heartland is Australia and New Zealand, it also has a significant institutional banking presence across Asia, helping large corporations with trade finance and capital flows. This has historically differentiated it from its peers, though its strategic focus can shift over time. For an investor, looking at ANZ isn't like looking at a fast-growing tech startup. It's like evaluating a piece of critical, long-standing infrastructure. It's a mature, slow-growing giant that is deeply intertwined with the economic prosperity of the region it serves.
“The big banks are not going to go out of business. It's a license to print money, really… if they're run with any intelligence at all.” - Warren Buffett (paraphrased, on the nature of large banking franchises)
A value investor isn't interested in fads or market sentiment. We are interested in buying wonderful businesses at fair prices. Analyzing a company like ANZ is a fantastic exercise in core value investing principles, for several key reasons:
This oligopoly leads to what investors call “rational competition.” The Big Four rarely engage in self-destructive price wars on their key products, like mortgages, because it would harm all of them. This allows for consistently high profitability over the long term.
Analyzing a bank is different from analyzing a retailer or a manufacturer. You need a specific toolkit. Here's a simplified checklist for evaluating the health and value of ANZ.
A value investor's analysis of ANZ should focus on three core areas:
Let's break down the key metrics for each.
| Metric | What it is | What to look for |
|---|---|---|
| PROFITABILITY | ||
| Return on Equity (ROE) | The single best measure of a bank's profitability. It shows how much profit the bank generates for every dollar of shareholder equity. | Consistently above 10-12% through the economic cycle is a sign of a strong franchise. High ROE indicates a powerful and efficient business. |
| Net Interest Margin (NIM) | The difference between the interest a bank earns on its loans and the interest it pays for its funding (like deposits). | A stable or rising NIM is positive. A rapidly falling NIM can signal intense competition or a poor interest rate environment. |
| Cost-to-Income Ratio | Measures the bank's operational efficiency. It's the bank's operating costs as a percentage of its income. | Lower is better. A ratio in the 40-50% range is generally considered efficient for a major bank. It shows management's ability to control costs. |
| FINANCIAL STRENGTH | ||
| Common Equity Tier 1 (CET1) Ratio | The most important measure of a bank's financial resilience. It compares the bank's highest-quality capital (common equity) to its risk-weighted assets. | This is the bank's “safety buffer.” Regulators set a minimum, but value investors want to see a buffer well above that. A CET1 ratio of 11% or higher is considered very strong. |
| Provision for Bad Debts | The amount of money the bank sets aside to cover expected losses from loans that might go bad. | Look for trends. A sudden, sharp increase in provisions is a red flag that the bank expects more customers to default on their loans, often a sign of a looming recession. |
| Deposit Funding | The percentage of the bank's loans that are funded by stable customer deposits versus more volatile wholesale funding. | Higher is better. Customer deposits are “stickier” and cheaper. A high reliance on short-term wholesale funding can be a source of instability in a crisis. |
| VALUATION | ||
| Price-to-Book (P/B) Ratio | Compares the bank's market capitalization to its book value (the net value of its assets). | Historically, buying a solid bank at a P/B ratio below 1.0x (i.e., paying less than the stated net worth of its assets) has been a good entry point for value investors. A ratio well above 1.5x suggests high expectations are priced in. |
| dividend_yield | The annual dividend per share divided by the current share price. | For a mature bank like ANZ, the dividend is a major component of total return. A high, sustainable yield can provide a margin of safety and a cash return while you wait for value to be realized. |
You cannot look at any single number in isolation. The key is to see the whole picture and understand the story the numbers are telling over time (at least 5-10 years).
Let's use the Price-to-Book (P/B) ratio to illustrate the value investing mindset. Imagine two investors, Prudent Penny and Speculative Sam, are looking at ANZ. The bank has a Book Value Per Share of $25.00. This is the accounting value of the business, per share.