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Westpac the key to last week’s gains

Investors in local shares have largely the banks to thank for their gains realised last week, as the market saw slight improvements despite turbulence being felt in overseas markets. Last week, the gains recognised in the banks helped to drive the S&P/ASX 200 (index: ^AXJO) (ASX: XJO) slightly upwards with a gain of 54 points, or 1.1%.

Shareholders in Westpac (ASX: WBC) were the biggest winners over the shortened week, seeing their shares climb 4.86% compared to National Australia Bank’s (ASX: NAB) 3.6%, Commonwealth Bank’s (ASX: CBA) 3.2% and the 4.19% gain for ANZ (ASX: ANZ).

During the week, Westpac announced that it would purchase US$3.5 billion in Government Guaranteed Debt, which would ultimately reduce their FY 2014 refinancing requirements by $4 billion. As investors gave their nod of approval, this news contributed towards the corporation’s surge for the week, as it highlighted the company’s strong funding position.

Furthermore, employment data showed that the unemployment rate actually fell in May, thanks largely to part-time positions, which should see the RBA prolong any further rate cuts. As the employment rate rises, so should consumer and business confidence to spend, which would result in more loans being taken out with the banks.

Amongst various other companies, the big four banks have been amongst the market’s best performers and have hugely contributed to the rapid rise of the market over the last 12 months. In fact, investors’ attraction to the high yielding banks actually saw Commonwealth Bank recently overtake mining heavyweight BHP Billiton (ASX: BHP) as Australia’s largest company by market capitalisation.

However, as the all-too-familiar case of ‘sell in May and go away’ has kicked in, the banks have all fallen significantly from their peaks. Whilst CBA, NAB and ANZ have all fallen between 9.5-14.5%, Westpac has fallen the heaviest with a loss of 16.8%.

Foolish takeaway

Investors have been attracted to the banks due to their high yields and safe-haven status over the last 12 months, however, their prices have risen out of proportion with their future earnings prospects. Despite their recent falls, each of the banks still seem very expensive, and it would be hard to justify adding them to your portfolio at these prices.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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