Each of Australia's major banks posted record profits last year totalling more than $27 billion combined. This was driven by a recovery in credit growth and record-low bad debts. While each offered attractive dividend yields, investors pushed share prices to new highs. Commonwealth Bank of Australia's (ASX: CBA) shares climbed 24%, while Australia and New Zealand Banking Group's (ASX: ANZ) and Westpac Banking Corp's (ASX: WBC) rose 29% and 22% respectively. Meanwhile, National Australia Bank Ltd's (ASX: NAB) shares soared 39%.
After a solid 2013, investors are wondering whether now is too late to buy in? Goldman Sachs analysts have predicted that profits will rise by 6.4% as both interest rates and bad debts remain low, while the dividends on offer exceed returns from term deposits. So what is there to lose?
Despite these forecasts, the banks' share prices have become overpriced and stand little chance of delivering market-beating returns. Analysts at Goldman Sachs agree, stating that the valuations on the banks remain "stretched", while figures compiled by Bloomberg, show that the share prices of the big four are at their most expensive since 2007 – prior to the global financial crisis.
According to Bloomberg, the banks are currently trading at 2.1 times the net value of their assets, which is the highest level in seven years and a whopping 75% more than the MSCI World Bank Index. While bad debts will likely remain low in the short-term, as borrowers continue to pay off their debts ahead of schedule, they will begin to climb when interest rates inevitably increase which will put pressure on the banks' profits.
What's more, the banks' ability to distribute special dividends or increase shareholder returns could come under pressure with each required to hold more capital in reserve in case of an economic downturn.
Foolish takeaway
There's no question about how strong each of the banks are. Each have delivered investors with fantastic returns over the years and are led by strong management teams. However, at today's prices it would be difficult to justify pressing the 'buy' button. Investors should wait for prices to fall before buying and should look to other high-yielding stocks in the meantime.
