Australia’s big banks are incredibly profitable businesses. They have juicy dividend yields and attractive economics.
Indeed, over the past 20 years the big banks have continued to dominate the local credit market and paid bigger and bigger dividends along the way.
However, with prices riding high, is now the right time to buy big bank stocks? Let’s take a quick look at three of investors’ favourites…
Westpac Banking Corp (ASX: WBC)
Despite coming very close to insolvency in 1992, Westpac has become a much larger and more profitable organisation in the past 20 years. It now controls massive amounts of Australia’s household credit, business credit and retail deposits. However, what many investors fail to remember is Australia has not experienced a recession in over 20 years.
Given the mining boom is now fading, property markets are peaking and unemployment is rising, Westpac’s outlook is patchy. It would be exceedingly difficult to make a recommendation for Westpac, at today’s prices, especially as it trades at over 2.08x book value per share and 2.79x tangible book value.
National Australia Bank Ltd (ASX: NAB)
NAB, like Westpac, has significant exposure to business banking and household lending. However, NAB also has international exposure. Through its stake in Clydesdale and Yorkshire banks in the UK and Great Western Bancorp in the US. The UK assets have proved troublesome for many years.
However the bank has begun to separate itself from its international assets. Most recently it divested part of its US bank through public markets and will look to do the same with its European assets.
Despite being the ‘cheapest’ of the big banks by most conventional valuation measures, given its accident prone history, investors would be wise to keep their distance until we get a lower price or the bank rids itself of its foreign exposure.
Macquarie Group Ltd (ASX: MQG)
Macquarie derives 65% of its income outside Australia and New Zealand. As our largest investment bank, it is heavily involved in capital markets facing businesses. It has over $400 billion in assets under management and a healthy exposure to Asia’s rising middle-class population.
After falling out of love with investors in a big way during the aftermath of the GFC, Macquarie now has a conservative balance sheet and growing annuity style businesses.
Given its overseas exposure, a falling Australian dollar and increased confidence in markets throughout the world, there’s certainly reason to be positive on the short and medium-term outlook for Macquarie’s stock.
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*Extreme Opportunities returns as of June 5th 2020
Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.
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