Is it a major own goal to buy the banks at today’s prices?

Dividends won’t compensate for the risks facing the banks.

| More on:

Headlines such as “Australian banks are the world’s most profitable” may entice even more buyers into this overcrowded sector of the ASX – especially with the dividend season soon to arrive. For investors, a headline such as ‘Australian banks are the world’s most overpriced’ would be more appropriate.

The brontosaurus in the room is the heavily indebted household sector and the banks’ ongoing reliance on selling even more loans into an increasingly fragile consumer market. As a result a whole generation has now lost the opportunity to buy a place and instead sometimes pays rent to a negatively geared and taxpayer subsidised owner who shouldn’t have bought the place. Some system!

Meanwhile countries such as Canada, New Zealand and the UK have acted to curb excesses in residential property lending – our authorities do nothing. Moody’s has warned about the Australian banks’ exposure to an increasingly dodgy sector – again we do nothing. So how are the big banks placed to deal with shrinking margins and a slowing in lending? – for the investor, not very well.

Australia and New Zealand Banking Group (ASX: ANZ) sells at 13.5 times estimated 2014 earnings and a prospective yield of 5.4%. The strategic move into Asia offers long-term growth, however the recent profit downgrade by Standard Chartered cited increasing competitive pressures in Asia as part of the cause of the downgrade and Standard Chartered is a big player in the region. ANZ shares have risen 17.5% over the past 12 months.

Commonwealth Bank of Australia (ASX: CBA) has risen 17.8% over the past 12 months and sells at an expensive 15.6 times 2014 earnings and a 5% yield. The financial planning scandal (well covered by Claude Walker) enveloping this bank will justifiably do damage to the brand. With high exposure to an inflated housing market; this bank is a definite sell.

National Australia Bank Ltd. (ASX: NAB) sells at 12.4 times estimated 2014 earnings and a 5.7% yield. The foray into the UK remains a millstone for this bank, however this has been priced in. One of NAB’s strengths is in business banking which should improve over time. NAB has risen 11.2% over 12 months.

Westpac Banking Corp (ASX: WBC) has high exposure to the housing market and continues to aggressively pursue mortgage loan growth. Having risen 18.7% over the past 12 months Westpac’s share price and growth prospects are limited. Selling at 14.1 times estimated 2014 earnings and a 5.2% yield this bank is excessively overvalued (in my view).

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of January 12th 2022

Motley Fool contributor Peter Andersen doesn't own shares in the companies mentioned

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

The share price of ASX infant products retailer Baby Bunting Group Ltd (ASX:BBN) has been a solid performer so far …

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

A new landmark report by the Intergovernmental Panel on Climate Change (IPCC) was released earlier this week. It provided a …

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest …

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos Limited (ASX: AMS) share price has been on a tear this past week, rising 15% on the back …

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

Online furniture retailer Temple & Webster Group Ltd (ASX: TPW) had a breakout year in 2020, moving from relative obscurity …

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

Shares in ASX healthcare company Polynovo Limited (ASX: PNV) almost doubled in price last year. And, despite a shaky start …

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

Investing in other geographic markets has become a popular way to diversify a portfolio. The risks associated with being exposed …

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

Despite the News Corporation (ASX: NWS) share price getting a 31% bump between November last year and today, News Corp …

Read more »