In comments that should sound a warning bell with investors, Australia and New Zealand Banking Group's (ASX: ANZ) Chairman David Gonski told Fairfax media that market conditions were 'quite scary' and he believed that shareholders were focussing on yield and ignoring risks.
Mr Gonski even went so far as to urge the Reserve Bank of Australia to leave interest rates on hold, believing that further rate cuts would only serve to increase booming house and share prices.
It's a valid fear, with UBS banking analyst Jonathan Mott pointing out that the Australian banking sector – which now comprises 32% of the top 300 companies on the ASX – was 'the largest exposure to the banking sector of any developed market exchange in history'.
Mr Mott also stated that the Big Four's forward P/E estimates of 15.6 were at an 'unprecedented level' and warned that, despite all the risks, attractive dividend yields of 4.8% could continue to drive bank shares higher.
Generally speaking, interest rates are lowered in order to spur economic activity like construction, business activity, and general entrepreneurship by making credit easier to access and thus reducing one of the hurdles that limits growth.
Low interest rates also can lead to increased consumer spending, thus stimulating non-business sectors of the economy as well.
This principle comes with a caveat – namely that consumers will only spend if they feel secure in their economic circumstances.
However, with consumer confidence still stuck in the doldrums, individuals are looking to bolster their financial situation by paying down debt and investing for the future in shares and property.
(Interestingly, 2014 research by RBA analysts concluded that there were no signs of a housing bubble)
Rate cuts haven't done much to spur economic growth, but they have lit a fire under perceived 'safe haven' shares like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB).
If you think I'm joking, look at the numbers.
Commonwealth Bank shares have risen 92.5% since March 30, 2012.
Westpac shares have grown 85.5% in that time.
NAB shares grew the least at 59.5% while ANZ shares have risen 61.8%.
This is before dividends, and by contrast the S&P/ASX 100 (INDEXASX: XTO) has risen 43% in the same time.
If you needed further evidence that shares might be overpriced, Commonwealth Bank chief Ian Narev sold $750,000 of his shares just a few weeks ago.
The risk of a decline in bank shares extends to the rest of the ASX, as a tumble by the big banks would surely drag many other companies down with them.
The Motley Fool's contributors like myself have been warning investors off the banks for a long time and, while we might have missed great bank gains in the past three years, there have been a number of other companies that have delivered even better performance.
Since March 30, 2012, TMF's Share Advisor analysts have picked seven companies that outperformed Commbank and Westpac shares, and another four that beat NAB and ANZ over the past 3 years.
Not all companies perform that well, but the point is you don't have to buy bank shares to deliver outstanding returns.
In fact, TMF recently released one of its Share Advisor recommendations to the public for free, as part of its ongoing mission to help Australians invest better.
As you might expect, this company has absolutely nothing to do with the banks, and instead leverages its dominant market position in Australia's booming online industry.
