Shares of Australia and New Zealand Banking Group (ASX: ANZ) have continued to tumble this week, taking its total falls over the past month to around 10%.
ANZ, like National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC), reported its half-year results earlier this month showing mild profit growth year over year.
However it was the commentary included in the bank's half-year update which is perhaps of most concern to investors.
Indeed, the bank's CEO, Mike Smith, said, "For the foreseeable future, we will be operating in a lower growth environment in which there will continue to be occasional volatility and shocks."
Over the past three years, shares of ANZ have rallied nearly 60% on the back of strong profit results and increased dividends to shareholders.
ANZ's strong performance has been buoyed by growth in Asia (largely thanks to the bank's unique Super Regional Strategy) and robust demand for credit (i.e. loans) in the Australian and New Zealand markets.
The problem for ANZ is the valuation of its shares has become eye-watering. Indeed, investors had assumed record profits would continue into the medium term. Unfortunately, that now appears unlikely.
The forecasts from each of the big banks are pointing to a bleaker economic outlook for local markets. Moreover, it'll likely be characterised by intense competition and further erosion in profit margins.
Ultimately, this will lead to lower profits and slower growth in dividends.
As the above chart shows, despite ANZ steadily growing its net interest income (the money it makes from lending to borrowers), its net interest margin has begun to fall heavily in recent times.
Should you Buy, Hold, or Sell ANZ?
ANZ shares trade at an expensive valuation at a time when credit growth (i.e. demand for loans) could be expected to weigh on record profits.
Personally, ANZ is my pick of the big banks. However, for the above reasons, I do not believe now is a good time to buy its shares. If I currently held ANZ stock I'd look to take some profits off the table.
