It's been an encouraging 2014 thus far for investors in Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC), with shares in both major banks outperforming the ASX year-to-date. Indeed, Commonwealth Bank is up 5% since the turn of the year, while shares in Westpac have made gains of 7% over the same time period. Both are ahead of the 4% gains made by the ASX. However, can the two banks continue to beat the index, or is it too late to buy in?
Income potential
The most obvious place to start with Commonwealth Bank and Westpac is their current yields. That's because they are hugely impressive, with both banks offering fat, fully franked yields. For instance, shares in Commonwealth Bank currently yield 5.1%, while Westpac offers investors slightly more with a yield of 5.2%. Both are well ahead of the ASX's yield of 4.4% and, when Aussie interest rates continue to remain at just 2.5%, Commonwealth Bank and Westpac offer a useful remedy for income investors.
Growth potential
Looking ahead, neither bank is expected to deliver stunning performance over the next couple of years. For instance, Commonwealth Bank is forecast to grow its bottom line at an annualised rate of 5.6% over the next two years, while Westpac's earnings are set to grow by 4.9% per annum over the same time period. Although both growth rates are generally in-line with the wider market, they are unlikely to attract a long queue of growth investors to the stocks.
Valuation
Indeed, when the two companies' valuations are first viewed, there appears to be considerable scope for share price increases moving forward. That's because the P/E ratios of Commonwealth Bank and Westpac are currently at a healthy discount to the ASX, with the former having a P/E ratio of 15.2 and the latter's P/E being 14.5. Both compare favourably to the ASX's P/E of 15.8.
However, when the two banks' ratings are combined with their forecast growth rates, the resulting price to earnings growth (PEG) ratios are somewhat disappointing. For instance, Commonwealth Bank has a PEG of 2.7, while Westpac's is 2.95 – both are much higher than the ASX's 1.78.
Looking ahead
So, while neither Commonwealth Bank nor Westpac scream 'growth at a reasonable price', with fat, fully franked yields they are likely to continue to be of interest for income-seeking investors. For growth investors and those primarily focused on capital gains, though, neither bank looks like the most enticing opportunity on the ASX right now.
