Australia's big four banks have enjoyed a tremendous run in recent years and have all jumped to fresh heights following the Reserve Bank's surprise interest rate cut earlier this month. But analysts and investors are, rightfully, questioning whether they can continue to rise or if this is as good as it gets.
Although Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) all reported record profits for their reporting periods, there were reasons to be concerned with each.
While NAB's net interest margin took a hit due to greater competition, ANZ's profits grew at a much slower clip than investors had been hoping for (particularly given its premium valuation) and Commonwealth Bank's CEO has offloaded more than $750,000 worth of shares in his bank. This is a potentially bad sign after he issued a sobering warning about the economy just last week. He said:
"The volatility of the global economy continues to undermine confidence, particularly the impact of lower commodity prices on national revenue… Weak confidence is a significant economic threat. Businesses need the certainty to invest to create jobs, and households need a greater feeling of security."
The fact is that it is the banks' generous dividend yields that are supporting the stock prices in this low interest rate environment. How else could you justify Commonwealth Bank's 17.1 price-earnings (P/E) ratio, or Westpac Banking Corp's (ASX: WBC) price of 15.7x last year's earnings?
Each of the banks maintain limited growth prospects, impacted by rising levels of competition, the scope for a decline in future credit growth as well as tougher capital regulations, which will likely be imposed on the "too-big-to-fail" banks. While each of the stocks could climb higher in the near-term, driven by the market's insatiable desire for solid yields, their ability to deliver long-term market-beating returns appears to be fading by the day.