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Why I’m not buying Commonwealth Bank of Australia and Westpac Banking Corp

Westpac Banking Corp (ASX: WBC) like its peer Commonwealth Bank of Australia has grown its earnings and loan book significantly over the past two decades, as Australia’s economy prospered like no other. Record earnings have been posted and surpassed many times.

So could more good times be just around the corner or are their record high share prices a cause for concern?

By the looks of their share prices, the former seems true. In the past three years alone they’re up 75% and 70%, respectively, compared to a gain of 34% from the S&P/ASX 200 (INDEXASX: XJO).

However with shares riding high, now could be a good time to show restraint. Here’s why.

  1. Shares are NOT cheap. Sure, given their wide economic moats and the state of the Australian economy, the two banks will survive a market crash (the biggest threat to them is significantly lower property prices). However since 2000, their share prices have fallen in a total of four calendar years, which should remind us that their upwards share price trajectory will not go on forever. With share prices historically high (across a number of valuation techniques), I’m holding off from buying, at current prices.
  2. Interest rates are low. One of the reasons why bank stocks are high now and are likely to see downwards pressure in the future, is low interest rates. Low interest rates fuel demand for big dividend stocks and will usually result in falling bad debts. Thus boosting profits considerably. Right now I believe we’ve already seen the majority of the benefits from the falling cash rate (in terms of falling provisions), so I’d rather wait for the trend to reverse and buy shares from everyone who sells out of fear or panic in the future.
  3. Growth. In years gone by, the mortgage market has fuelled record earnings growth (and that’s likely to continue), but competition is heating up and banks cannot rely on industry consolidation to pick up the slack (remember these two have bought RAMS, St.George and BankWest since 2000). With around 80% market share of mortgages between CBA, Westpac, National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ), margins have already come under pressure from the increased competition.

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I think Westpac Banking Group and Commonwealth Bank of Australia are great companies to hold in your portfolio, but no stock is a buy at any price and investors should look for other, cheaper and faster growing stocks to buy today.

For example, our top analyst, Scott Phillips, recently identified one cheap but growing ASX stock with a 6.7% grossed-up dividend yield which I think is a STANDOUT buy today. If you're interested in knowing its name, just click on the link below, enter your email address and we'll send you the FREE report on his top dividend stock idea for 2014 - 2015!

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

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