Bank stocks have been hit hard in the past month as the S&P/ASX 200 (INDEXASX: XJO) dropped over 4%.
Not even the too-big-to-fail ‘Big Four’ have been able to avoid the sell off by local and foreign investors.
Since this time a month ago, Westpac Banking Corp (ASX: WBC) has been hit the hardest of all the ASX-listed bank stocks. Yes, even the tiny Wide Bay Australia Limited (ASX: WBB) has emerged in a better position than Westpac, falling only 2.7% whilst our second-largest bank peeled off 6% of its market capitalisation.
Stock market vicissitudes are part and parcel of successful investing over the long term, but there are many reasons why Westpac has fared worse than its peers. As I have done on many occasions in the past two years, last month I highlighted three reasons why Westpac was likely the worst bank stock at current prices.
I said it lacked growth, its shares weren’t cheap and, frankly, there were better opportunities available elsewhere. I continue to think all of this is true so despite trading on a trailing dividend yield of 5.6% fully franked, I believe all investors should adopt a wait-and-see approach.
I’m not keen on buying bank stocks in the current market because – as Motley Fool investment advisor Joe Magyer explained here – during bull markets, banks are priced off their earnings potential (think P/E multiple), but during a bear market their valuations are derived from their asset base (i.e. price to book ratio). At those times they they tend to be cheaper.
However, if I was going to buy a big bank at current prices it’d be Bank of Queensland Limited (ASX: BOQ). Despite recently losing its CEO Stuart Grimshaw the bank is well funded and growing.
Indeed, chairman Roger Davis said he expects the bank to post a cash profit of around $250 million (in line with analyst expectations) on October 9, when it reports its FY14 full-year results.
In addition to its growth potential, the bank offers a 5.1% fully franked dividend, boasts a very healthy common equity tier-1 ratio, a good net interest margin and decent return on average tangible equity.
I’d also consider adding Bendigo and Adelaide Bank Ltd (ASX: BEN) to my portfolio before any of the big banks. It remains very profitable and according to its full-year results is growing its deposit portfolio quicker than any other Australian bank. This is a very good sign because it also maintains good levels of profitability, although I’d like to see a lower cost-to-income ratio in the near future.
Buy, Hold, or Sell?
At current prices I rate Westpac a sell because I can’t see it beating the market over the medium term and if I were going to buy any bank today, it’d be BOQ. However, I’m not buying it because I know I don’t have to swing at every pitch!
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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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