Australia's big 4 – Commonwealth Bank (ASX: CBA), Westpac Banking Corporation (ASX: WBC), National Australia Bank (ASX: NAB) and ANZ Banking Group (ASX: ANZ) – are forecast to record modest earnings growth in 2015 and 2016, according to financial services giant Credit Suisse.
In a Wall Street Journal article, the firm believes earnings per share growth will average 8% in FY14, 2% in 2015 and just 3% in 2016. It acknowledges that provisions for bad and doubtful debts are low and tipped to modestly decline, cost to income ratios are staying relatively flat and revenue growth is improving.
Despite signalling lower growth, it believes bad debt charges will remain benign and the level of tier-1 equity ratios will rise, over time. The firm currently rates ANZ and NAB as outperform and CBA and Westpac as underperform.
What does this mean for bank shareholders?
At the Motley Fool Australia we've been saying for some time that bank stocks are fully valued. At first, the big banks' half-yearly and annual reports can seem convoluted, but just by using common valuation techniques, we can gauge the likelihood of them outperforming the market.
Using current, historical and forecast price-earnings ratios, price-earnings-growth ratios and price to book ratios, it's easy to see they're not cheap. Although lofty share prices can sometimes be justified by high growth forecasts in the short and mediums terms, it appears (perhaps with the exception of ANZ) that none of the big banks are offering investors substantial long-term growth strategies.
Their provisions for bad and doubtful debts could well fall in the short-term, giving the illusion of exceptional earnings growth. The reality is that the best time to buy bank shares is when interest rates are high, bad debts have piled up (to a manageable level, of course!) and the market is in a state of panic. Just imagine buying ANZ shares for only $12 per share in early 2009!
