Is it time to buy bank shares?

Over the past 12 months, bank shares rose to precarious levels, way beyond the movements of the S&P/ASX 200 (ASX: XJO) (Index: ^AXJO), only to fall back to realistic prices. It begs the question, is now is the right time to start grabbing a bargain?

Historically, bank shares and large financials have always risen when times get tough for term deposits. People make the trade from savings accounts that pay minimal amounts, especially when interest rates are expected to drop even further.

The past 12 months saw every one of the big four, excluding the NAB (ASX: ANB), reach all-time highs. But hopefuls who took the dive in the big four for steady share prices and healthy returns were set back with huge drops in their share price in the past month. If investors were hoping for a cushy 5% dividend return, they were wrong. Instead, shares in Westpac (ASX: WBC) and CBA (ASX: CBA) dropped 12.5% and 8% respectively.

It’s easy to understand the allure of the big four banks, with some claiming them to be not only the most profitable in the world but the safest as well. However, when they were reaching their peaks only a month ago, alarm bells were starting to ring loud and clear. With over 50% gains in share prices but only 1-2% gains in profit, largely from cost-cutting rather than expansion, something had to give.

Now that some of the banks, like ANZ (ASX: ANZ) and NAB, have paid their dividends, investors are left wondering if they are deserving of a spot in their portfolio. In short, the answer is that it would have been better to do it now rather than a month ago but in the long run is where the real money is to be made.

Foolish takeaway

Looking at the big four, if you wanted safety you’d go with CBA, but if you wanted growth it’d be ANZ. However, CBA remains the most expensive of the big four and it seems as though expectations are making up part of the share price. Analysts at UBS (NYSE: UBS) also believe that CBA is the most expensive bank in the world, not a title I want one of my stocks to hold.

Perhaps it’s for the dividend later in the year or investors are highly valuing safety, either way there are better places for your money right now because it may get even cheaper when longer term shareholders begin to sell off their stake in the company. After all who could blame them for sitting on capital gains of 30% plus dividends?

The Australian Financial Review says “good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit.” Get “3 Stocks for the Great Dividend Boom” in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

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Motley Fool contributor Owen Raszkiewicz owns shares in ANZ.

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