Australia’s big four bank stocks have gone from strength to strength since May last year, aided by falling interest rates (sparking a search for yield) and continued resilience of the domestic economy. However now it could be coming undone and investors both locally and abroad are beginning to question whether or not the banks’ current share prices are sustainable.
On current valuations, the stock prices of Australia’s two biggest banks are most highly valued, both with price to earnings ratios above 14. Perhaps investors are expecting the recent hike in property prices will help buffer the huge profits that both Commonwealth Bank (ASX: CBA) and Westpac (ASX: WBC) have recorded.
Many investors are realising the current trend is unsustainable and our two biggest banks have the highest levels of ‘short’ positions. Traders take a short position when they believe the value of the stock is headed downward. According to the Australian Securities and Investment Commission 0.74% of Westpac shares are short whilst 0.58% of Commonwealth Bank shares are tipped to head lower.
Some traders may see these figures and credit much of the bullish sentiment to the US Federal Reserve’s decision about its bond buying program, or Quantitative Easing (QE), which is due later in the week.
Bank of America Merrill Lynch chief global equities strategist Michael Hartnett told the banks’ conference in New York last week, “There are a number of hedge funds that are short the Australian banks right now, trying to play on that demise of emerging markets”.
Earlier this year, UBS said that the Commonwealth was the most expensive bank by almost every measure. CLSA bank analyst Brian Johnson told the Australian Financial Review, “On any ex-dividend measure they [banks] look very expensive”.
Another concern for Australia’s big banks is their revenue growth. Commonwealth and Westpac draw huge amounts of revenue (above 95%) from Australia and New Zealand alone and have a much higher market share of home loans than both NAB and ANZ. International investors have been concerned that Australia is experiencing a housing bubble and the slowdown in the economy will hurt our banks.
However, Bendigo and Adelaide Bank (ASX: BEN) CEO Mike Hirst, said many international investors are changing their perspective on a potential bubble in property, “I came here [New York] four years ago and they’d walk through the door, sit down and say ‘can you tell me how I can short the Australian housing market’… we’ve had none of that this time.”
In this Fool’s opinion, the big banks are overpriced. They’ve experienced tremendous growth over the past decade but a slowdown in mining, lower interest rates and rising unemployment could hurt their results going forward. Although they are well managed, iconic Australian businesses there are better stocks available on the market.
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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.