Although the gains recognised by Australia's big four banks over the last 18 months have them now ranking amongst the world's most expensive, investors are still finding themselves attracted to them due to their high dividend yields.
According to a new report by UBS, the banks are currently trading on a forecast price to earnings ratio of 14. This is hefty in comparison to the banks of other nations, including 10.6 in Japan, 13.1 in the US, 13.3 in Europe, 11.7 times in Britain and a global average of just 11.1.
Despite this inflated figure however, domestic and foreign investors remain interested in the banks' stocks due to their high yields – particularly given that the securities have dropped in price over the last few weeks. Whilst each of the big four have fallen between 5.9% and 9.9% since achieving their record or multi-year highs, their dividend yield has risen, increasing the appeal.
ANZ (ASX: ANZ), for instance, is offering investors a 5.3% distribution whilst NAB (ASX: NAB) offers 5.8%. Commonwealth Bank (ASX: CBA) and Westpac (ASX: WBC) are also offering a 5% and 5.5% yield, respectively (Westpac also initiated two special one-off dividend payments over the last 12 months).
Meanwhile, UBS continues to see bright prospects for the banks in 2014 with "another year of super low bad debt charges" expected in light of interest rates remaining low and the booming real estate markets.
The problem for investors however, is that whilst 2014 may prove to be another successful year for the banks, it is the long term that counts. When interest rates inevitably rise (whether that be next year or the year after or even later down the track), bad debts will also rise which will impact on profitability.
That isn't the only risk facing the industry. The banks' dividends could become limited in the short- to medium-terms as the Australian Prudential Regulation Authority (APRA) increases the required amount of capital to be held, whilst the eventual tapering of the US Federal Reserve's bond buying program could also have its impact.
Foolish takeaway
As Foolish (note the capital 'F') investors know, no stock is a buy at any price. The banks have become overpriced and, even if their shares do continue to perform over the next year, it is unlikely that they will deliver market-beating returns in the long-run. At today's prices, your money would be better served elsewhere.
