Many Australian SMSF or retail investors will directly hold shares in the big banks like Westpac Banking Corp (ASX: CBA) or National Australia Bank Ltd. (ASX: NAB) in their investment portfolios. If they don't own them directly most Australians will probably have indirect exposure to them through their superannuation funds having some ownership interest in at least one of the big banks.
In fact the big banks make up around 29% of the entire S&P/ASX 200 (Index: ^AJXO) (ASX: XJO).
It's not surprising then that whether they represent good value or not is topic of hot debate for the media and share market analysts.
Today The Australian Financial Review is reporting that a fund manager named Ben Clark at TMS Capital thinks the banks look good value after recent price falls.
Mr. Clark is quoted as saying: "Banks look on the cheaper side of fair value but they are heading into a tougher time. However, now is the wrong time to get bearish. They don't look expensive, the dividend yields look sustainable and are attractive. What they do lack is a catalyst to get them going."
This is something of a mixed message describing banks as on the cheaper side, but "heading into a tougher time".
However, what's not in doubt is that the fully franked dividends in the region of 5% to 6% plus tax credits remain attractive to income-seeking investors, with my preferred pick being Commonwealth Bank of Australia (ASX: CBA).
Why?
Research by funds management group Aurora showed that Commonwealth Bank performed the best among the big four on a number of metrics for the banks' most recent reporting periods:
- Commonwealth Bank had the highest revenue growth achieving 5%
- Commonwealth Bank had the highest cash earnings growth reporting a 6.4% increase
- Commonwealth Bank's return on equity was the highest at 17%
The CBA does trade on a slightly higher price to book ratio and multiple of earnings than all of its big 4 peers, but given the superior quality I believe it will outperform its rivals over the next three to five years.
