What's new? ANZ followed in the footsteps of its closest rival, National Australia Bank, last week to deliver a full-year earnings result that would be the envy of many offshore peers.

For the banks, it's all about "jaws". The word in this case refers to the difference between the banks' revenue and cost growth. We may not be talking about great whites but the jaws can still do serious damage to a bank's valuation.

A significant factor in last year's banking-sector collapse was the fear that higher funding costs and slower lending growth would cause the jaws to narrow for a prolonged period. The evidence suggests this is not the case. ANZ's revenue for the year expanded 17 per cent, while costs grew by just 12 per cent. Rather than remaining locked, the jaws are opening and this can only be positive for earnings.

ANZ's Global Markets divisions served as a major driver of the revenue growth. Importantly, though, the core banking operation is benefiting from improved pricing power. This is enabling ANZ and the banks in general to charge higher rates of interest relative to their own interest payments. In doing so, the banks are clawing back earnings previously lost to non-bank lenders.

The outlook At the heart of the financial crisis was underpricing of risk. For banks, this meant lending too much and charging too little. Although the Australian banks proved to be fairly conservative, they do not have an unblemished record.

The extent of their loan loss provisioning is certainly testament to this.

Loan losses in ANZ's case wiped more than $3 billion from its latest annual earnings. ANZ unfortunately has the largest exposure to the beleaguered New Zealand economy of any of the big four.

About half of the bank's 2009 loan loss growth came thanks to that country and it will remain a headwind into next year. The good news is the loan loss cycle appears to be peaking and next year's result should show improvement.

Price Unlike the wider market, the banking sector set its low in February. ANZ hit its low of $12.02 mid-month before recovering through March. The stock then hovered at about $16, before a rally in July in which its price more than double from the low. One would not normally associate this kind of price action with one of Australia's largest businesses. But then, this has clearly been no ordinary market.

Worth buying? Although management continues to be a cautiously optimistic, the outlook for the banks has improved since last year. So too has their stockmarket valuation. As such, we will wait for more heat to come out of the sector before stepping back in. When we do again look at buying banks, ANZ will be high on our list. Chief executive Mike Smith has established a firm foundation for growth through his bottom-of-the-market acquisitions. ANZ's Asian growth strategy will serve to enhance the benefit of a stronger competitive position in Australia in the years ahead.

Colin Whitehead is an analyst at Fat Prophets Sharemarket Research.