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Could the big four banks be a ‘Buy’ after all?

Despite their lofty valuations, Charlie Aitken of Bell Potter Securities has taken a rather upbeat stance on Australia’s big four banks saying that they could do well in today’s low interest rate environment – a stance he has also taken on Telstra Corporation Ltd (ASX: TLS).

Interestingly, Aitken has previously been “underweight” on the banks, having suggested investors sell their shares in August last year following what had been a two-year rally. A recent decline in global bond yields appears to have prompted a major rethink.

As reported by Fairfax media, Aitken believes the potential for dividend growth from the major banks could help them deliver better total returns than the broader market. He said: “With benign bad debts, [net interest margins] maintained, falling wholesale funding costs and quantified regulatory capital risk the sector now looks primed for total return outperformance.”

Aitken’s stance on the banks is quite different to those taken by various other analysts who believe the sector is overpriced. Fitch Ratings, for example, recently released a report outlining the headwinds facing the banking majors, including a possible reversal in bad debt levels and a slowing economy. Others have questioned the banks’ ability to continue raising dividends in light of tougher regulatory requirements.

It’s certainly possible that the big banks will rise further in the near term, as is being suggested by Mr Aitken. Should the Reserve Bank cut interest rates further (a scenario looking increasingly likely), the yields offered by the banks could motivate investors to buy.

However, over the medium term, the banks seem unlikely to deliver market-beating performances. Commonwealth Bank of Australia (ASX: CBA), for instance, is trading within a few percentage points of its all-time high and is one of the most expensive bank stocks in the world, while Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) are also trading on high premiums.

Investors who buy the bank stocks today would be taking an unnecessarily high level of risk to receive decent dividend yields. The Motley Fool’s top investment advisor has uncovered another high-yielding stock, which also boasts strong growth potential and could be a far better buy than the big four.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned. You can follow Ryan on Twitter @ASXvalueinvest.

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