SKN | Valuing ANZ Shares: Two Simple Frameworks That Still Matter for Bank Investors

Key Takeaways for Investors

• Bank valuation is about income durability, not growth narratives.

• ANZ trades below sector-average earnings multiples, offering valuation context rather than a clear mispricing.

• Dividend-based models remain central when assessing Australian banks.

• Quantitative tools are a starting point, not a conclusion.

The ANZ Banking Group share price is perpetually in focus—and with good reason. Australian bank stocks represent roughly one-third of the domestic equity market by capitalization, making them foundational holdings for income-oriented portfolios. With ANZ trading around $36.42, investors often ask a simple question: is this price justified?

Below are two practical valuation tools frequently used by bank analysts to frame that answer.

1. Using the PE Ratio as a Relative Valuation Tool

The price-to-earnings (PE) ratio compares a company’s share price to its earnings per share (EPS). For banks, this metric is best used relatively, not in isolation.

ANZ reported FY24 EPS of $2.15. At a share price of $36.42, this implies a PE ratio of approximately 16.9x. By comparison, the broader Australian banking sector trades closer to 19x earnings.

Applying the sector-average multiple to ANZ’s earnings results in a sector-adjusted valuation of roughly $40.50 per share. This does not mean ANZ should trade there—but it provides a reference point. Investors must then assess whether ANZ deserves to trade at a discount or premium based on return on equity, balance-sheet strength, loan mix, and strategic positioning.

For banks, PE ratios help answer one question only: Is this bank priced conservatively or aggressively relative to peers?

2. Dividend Discount Model: The Bank Analyst’s Anchor

For mature banks, the Dividend Discount Model (DDM) remains one of the most relevant valuation frameworks. Australian banks are income vehicles first and growth stories second.

The DDM values a share based on the present value of future dividends, using the formula:

Share price = Dividend / (Required return – Dividend growth rate)

Using ANZ’s most recent dividend of $1.66 per share, and applying a range of dividend growth and discount rates (between 6% and 11%), the model produces an estimated valuation of approximately $35.10 per share. Adjusting the dividend slightly higher to $1.69 lifts the valuation to around $35.74.

Compared to the current market price, this suggests ANZ is fairly valued, with limited margin of safety based purely on dividend fundamentals.

Why These Models Are Only the Beginning

Valuation models are tools—not decisions. For banks, qualitative factors often matter more than spreadsheet outputs. Credit growth, housing market dynamics, unemployment trends, regulatory capital requirements, and funding costs all shape long-term outcomes.

With interest rates easing, income-focused portfolios may regain appeal, but investors should still assess earnings sustainability, not just headline yields.

Closing Insight

For bank stocks like ANZ, valuation discipline matters more than precision. PE ratios frame relative value; dividend models anchor expectations. The real edge comes from understanding how economic cycles, regulation, and credit quality interact beneath the numbers.

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