The Big Four Banks: Which is the best one for investors in 2023?

The so-called Big Four Banks on the ASX are among the ASX’s most prominent companies.

They are capitalised at nearly $400bn collectively, record among the largest profits of any listed company and are renowned for being the most significant dividend payers.

At the same time, they are among the most highly-regulated and scrutinised Australian companies.

So of all the big four banks, which one is the best? Ultimately, we think the answer comes down to an individual investors’ objectives. 

 

 

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What are the Big Four Banks?

The term ‘Big Four Banks’ alludes to the Commonwealth Bank of Australia (ASX:CBA), Westpac Banking Corporation (ASX:WBC), Australia and New Zealand Banking Group – or ANZ Bank for short – (ASX:ANZ) and National Australia Bank (ASX:NAB).

These banks hold the largest majority of loans and deposits in Australia and all have an ‘oligopoly’ market position.

As a result, Australian consumers have a love-hate relationship with them. 

 

 

Which of the Big Four Banks is the biggest?

CBA is the biggest of the Big Four Banks by market capitalisation. It also has the highest market share in payment terminals and business transaction accounts. 

However, NAB is the largest lender with $288bn in loans vs CBA’s $254bn. Furthermore, even where CBA has the largest market share, it faces significant competition. 

Although CBA has the largest mortgage lending market, at 25.9%, Westpac is not far behind with 22.5%. ANZ and NAB have just over 14% each.

Conversely, even though NAB is a laggard in home loans, it is easily the largest business lender (hence explaining why it has the largest amount of total loans), notwithstanding it has only a 20% share versus CBA’s 17.7% share.  

 

The state of the market

For the sake of investors that have been living on Planet Mars for the past three years, let’s recap how the big four banks.

The COVID-19 pandemic, and fears that it would cause an economic depression, led to the RBA, the big four banks and their smaller peers cutting interest rates to record lows.

Since May 2022, however, the RBA has delivered 10 consecutive interest rate increases, all passed on by CBA and its peers.

At first glance you might think this will be positive for the big four banks, given higher interest payments as fixed-rate loans revert to the new rates, therefore generating higher earnings. 

However, three things should be borne in mind.

First the big four banks are still having to compete for home loan customers as they look for the best deal – potentially offering discounts to incentivise them to refinance with them or just stay. 

Second, banks are also hiking deposit rates and this will eat into their profits as well. 

And third, it remains to be seen how many of these customers who took out loans at record low rates can cope with such high interest rates. 

Remember that the RBA’s cash rate has grown by more 3%, 50% more than the typical serviceability buffer banks use when considering new applicants. Many banks have gone even further.

The Silicon Valley Bank (SVB) collapse has added a further spanner into the works.

In our view, none of the Big Four Banks are unlikely to be impacted by the direct collapse of the company. 

However, if there is a broader economic fallout this could impact the banks.

As of the time we wrote this article, a few days after the collapse and the guarantee of all SVB customers’ money by the Federal Reserve, the impact is uncertain. 

 

The state of each of the Big Four Banks

In the last couple of years, NAB and CBA have been performing better than Westpac and ANZ from many perspectives, especially the share price.

CBA has tended to outperform its peers and it has in the last five years, sitting on a 24% gain as of mid-March 2023. The other 3 are all in negative territory in five years: NAB by 5.5%, ANZ by 18% and Westpac by 28%. 

All of the Big Four Banks are in negative territory on a 12-month basis. CBA is the ‘least worst’ having only suffered a share price decline of 8%. 

 

 

This being said, some of the big banks can have spectacular runs. As a point of example, NAB’s share price more than doubled between the Corona Crash and early February 2023. 

 

 

Why was this? Because other than CBA, it has been the best performing Big Bank.

After being the most heavily scrutinised during the Royal Commission, it hired Ross McEwan as CEO and it has been able to grow its business banking unit stronger than the competition and returned its home loan unit to growth.

Meanwhile, Westpac and ANZ have lagged. Westpac has never been able to regain its mojo with investors since its $1bn AUSTRAC fine back in 2020.

As for ANZ, it lost ground to its peers due to lagging technology.

 

Which of the Big Four Banks offer the best prospects?

This is a difficult question to answer. 

Looking to consensus estimates, the bank with the largest upside is Westpac with:

• The largest mean target price premium relative to its peers (16%)
• The highest mean Long-Term Growth estimate which is 1.3%.
• The highest EPS growth for FY23, with 43% growth from $1.48 to $2.18.

If we assume it pays out 79.4% of its profit, it would pay $1.73 per share for the full year and this would represent an 8.2% yield. 

On that basis you might conclude Westpac has the best prospects of the big four.

But these estimates assume the company’s issues with its reputation will cease to linger (and thereby inhibit the stock’s growth) as well as that there’ll be no major economic downturn. 

Some investors may be comfortable with that risk, but others may think it safer to stick with banks that are already performing well. 

 

Conclusion about the Big Four Banks

In our view, investors looking for the best big bank stock in Australia should make the decision on what they are searching for – long-term growth, dividends or just short-term stability.

Investors wanting short-term stability might be best sticking with CBA or NAB, while long-term growth oriented investors might look to ANZ or Westpac. 

Dividend oriented investors may look to CBA because of its track record of paying out the highest dividends, although they may not be the highest yielding.  

In any case, all investors should examine factors such as financial performance, risk profile, dividends yields and volatility over time. 

This will provide an indication of which of the Big Four Bank stocks could be most beneficial for you as an individual investor. 

 

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