Banks soar past $400 billion mark

Shares in Australia’s big four banks have received yet another burst of life over the last few days as anticipation grows over their pending annual profit results, sending the combined value of the banks soaring up past the $400 billion mark.

Whilst is has been expected that each of the banks would deliver record annual profits, just as Commonwealth Bank (ASX: CBA) did in August, investors have also been expecting a heavy increase in dividend payouts.

ANZ (ASX: ANZ), which this morning reported an 11% increase in net profit after tax (NPAT) to $6.27 billion, also increased its total dividend for the year to $1.64 per share – at the upper end of analysts’ expectations. NAB (ASX: NAB) and Westpac (ASX: WBC) will also report over the next two weeks. Whilst NAB should increase its dividend by around 9 cents, Westpac is expected to announce a special one-off 10c per share dividend.

Expectations regarding higher yields have pushed shares in the banks to new highs, resulting in a combined value over $400 billion. In fact, according to Bloomberg’s World Bank Index, Westpac and Commonwealth Bank are now included in the world’s top 10 biggest banks, boasting market capitalisations of $107.6 billion and $124.67 billion, respectively.

However, they are also amongst the most expensive. As reported by The Australian Financial Review, Perpetual’s head of investment market research, Matt Sherwood, believes that the banks are expensive relative to their global peers on just about every financial analysis measure conceivable, with the exception being yield. This further suggests that shares in the banks will fall as the yields become less attractive (for instance, when interest rates inevitably begin to rise).

Sherwood said “The most important thing investors must remember is that bank earnings are not riskless… What we are going to find out is that the bank environment hasn’t really changed.”

Foolish takeaway

Whilst there is no doubting that the banks are quality businesses, their shares are currently trading at very unattractive prices and it remains very difficult to see how they could deliver market-beating returns in the long run. As such, investors should look for other alternatives for their portfolio.

After all, the banks aren't the only companies that offer fantastic yields. You could discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

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

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