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Are the big banks overpriced?

Have investors, searching for dividends driven the big banks prices to crazy levels?

It might appear so, with the big four, ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX:CBA), National Australia Bank (ASX:NAB) and Westpac (ASX: WBC), adding $40 billion in market capital between them in the last six months.

Commonwealth Bank, in particular, has seen its shares rise by over 15% in the last six months, hitting an all-time high of over $65 in early trade today, and valuing the bank at more than $100 billion. And this comes at a time when the banks are experiencing low levels of growth.

The acceleration of investors out of low interest rate bank accounts and deposits and back into the market, primarily into high dividend paying shares looks set to continue, as deposit rates fall. Investors appear to be gravitating to companies that they know well, such as the big banks and Telstra Corporation (ASX: TLS).

Concerns that ratings agency Moody’s will slash Australia’s banks’ ratings have been brushed off, after Moody’s cut the credit ratings on five Canadian banks. Canada’s banking system is often compared to our own, being similarly structured.

But the downgrade should come as a warning to all bank investors. After all, Moody’s cited an overheated property market and highly indebted customers as the reason for the ratings cut, something that we could see in Australia.

With falling mortgage rates, we could see property prices boom, as consumers take on extra debt to invest in property and not ‘get left behind’. Faced with little or no credit growth currently, banks may be forced to take on more risk to generate returns – a move that could blow up in their faces.

Investors in bank shares could also see share prices fall from here, as fund managers and professional investors take money out of the banks, and invest in other stocks that have more potential growth.

Foolish takeaway

With every man and his dog racing to buy shares in the big four banks, they could unwittingly be encouraging traders to buy in as they follow the upward price trend. All of which sounds like a perfect ‘house of cards’ to me. That’s one reason why I won’t be buying into the banks anytime soon.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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