With an implicit guarantee from the Australian Government and non-stop economic growth in the domestic market, our big four banks have produced truly great investment returns.
Indeed Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and even the troubled National Australia Bank Ltd. (ASX: NAB) have proven to be exceptional investments over the past 20 years.
Their impeccable credit ratings and dominance of the housing, business banking and consumer credit markets gives them a wide economic moat (competitive advantage) over smaller peers and new market entrants.
These unique characteristics enable them to borrow money from international markets at a cheaper rate and pass the savings onto mortgagees. Further enhancing their dominance.
Today, the Fairfax Press reports the big four banks are expected to raise up to $134 billion from foreign wholesale markets in the next year, the highest amount since 2009 – 2010.
However every share market investor knows when something looks too good to be true, it generally is. Indeed whether investors choose to accept it or not, the low interest rate environment has benefitted our big banks fourfold.
For example, it has made funding much cheaper.
It also spurs on demand for loans by opportunistic property investors who are looking to take advantage of cheap credit.
Then there are investors looking to escape low interest rates in term deposits and savings accounts. Naturally demand for big dividends, pushes up share prices (currently all the banks offer dividend yields in excess of 5% grossed-up).
Finally low interest rates result in falling bad debts, which boost bank profitability in the short-term.
Should you buy, hold, or sell big bank stocks?
Given where we are in the interest rate, property and share market cycles, I'm very reluctant to recommend big bank stocks. Especially when we consider their lofty valuations.
Indeed current shareholders would want a healthy margin of safety between what they paid for their shares and the current market price because when the cycle reverses – and big banks stocks aren't in vogue – expect their share prices to come under pressure.
