Which big bank stock should you buy?

Although they announced big profits, it might be time to look at other top dividend ideas.

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In the past 3 years the markets rally can largely be attributed to the rise of the big banks and Telstra (ASX: TLS). Between them, they account for over 35% of the S&P/ASX200 (ASX: XJO) (^AXJO).

Therefore it is no wonder the index’s rise has slowed in the past 12 months, up just 4%, as investors began to reconsider just how expensive big bank stocks have become. However, with a recent batch of positive results just released, perhaps it’s time to check-in on Australia’s favourite financials. Here is a summary of their results.

1. Commonwealth Bank (ASX: CBA) reported their interim results earlier in the year and surprised the market with a huge 14% lift in first half cash profit to $4.268 billion. While revenue was down 3% at $22.29 billion.  The net interest margin (a key measure of bank profitability) fell 3 basis points to 2.14%. Total provisions for impairments fell 9%.

2. Westpac Banking Corporation’s (ASX: WBC) half-yearly results were perhaps the most underwhelming of the big four banks. Although it maintains high levels of tier 1 capital (currently at 8.82%), cash earnings grew only 8%. Quarter-on-quarter provisions fell around 15%.

3. National Australia Bank (ASX: NAB) managed to put its troubled past in the UK behind it and notched-up 8.5% cash earnings growth in its first half of 2014. However, perhaps alarmingly, it said “[higher cash earnings] was driven by lower charges for bad and doubtful debts, partially offset by higher expenses due to UK conduct related matters.” It seems increasingly likely NAB will try to offload its troubled Clydesdale and Yorkshire banks (both based in the UK) in the near future.

4. ANZ Banking Group (ASX: ANZ) grew half-yearly cash profit by 11% to $3.5 billion. Its International & Institutional Banking division was a standout performer and continues to have a bright future ahead of itself. ANZ’s provisions dropped by 11% whilst it net interest margin was also squeezed to just 2.15%.

While each of the big banks are growing profits, in this Fool’s humble opinion, it appears the stellar results are due largely to lower provisions for bad and doubtful debts. With each growing cash earnings between 8% and 15% in the 1H14 it would be hard to justify buying their shares at current prices – keeping in mind they each grew roughly 40% or more in the past 2 years.

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.  

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