The Motley Fool

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

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).

You'd better take a look at this… especially if you own bank shares!

Warning: What you read in this newly updated investment report could surprise you! Be sure to get your FREE copy of "What Every Bank Shareholder Must Know" right now. This newly updated report is yours free when you click here now.

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

NEW. Five Cheap and Good Stocks to Buy in 2019…

Our Motley Fool experts have just released a brand new FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.8% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.

CLICK HERE FOR YOUR FREE REPORT!