Australia's big four banks are incredibly well run businesses that maintain sustainable earnings and provide investors with reliable dividend income. Shareholders, however, would be wise to consider alternative options for their hard earned money.
On most measures, Australia's big four banks are the most expensive bank stocks in the world. The behemoth of the ASX, Commonwealth Bank of Australia (ASX: CBA) is currently valued at $152 billion and trades on a price/earnings multiple of 17.4 times. This compares unfavourably with the largest U.S. banks, Wells Fargo and JP Morgan Chase, which are valued at 13.8 and 11.5 times earnings respectively. Across the Atlantic, the largest European bank, HSBC Holdings, trades at 12.9 times earnings.
High valuations such as these are usually reserved for stocks that exhibit significant growth potential. National Australia Bank Ltd (ASX: NAB), which is valued at 18 times earnings, has struggled to grow its profits over recent years. From a cash profit of $5.46 billion in 2011, NAB has reported profits of $5.43 billion in 2012, $5.75 billion in 2013 and just $5.18 billion in 2014. Westpac Banking Corp (ASX: WBC), meanwhile, has lifted profits by just 8% over the past four years, from $6.99 billion in 2011 to $7.56 billion in 2014 — hardly enough to justify its premium valuation of 16.7 times earnings.
Profit growth amongst the banks is likely to be further constrained by any burst that may happen in Australia's bubbling housing market. The Reserve Bank of Australia recently cited the elevated house prices as one of the reasons contributing to its decision to leave interest rates on hold despite weakness in the rest of the economy.
Australia and New Zealand Banking Group (ASX: ANZ), like the other big four banks, is heavily invested in housing with over $270 billion in outstanding housing loans. Any correction in national house prices would lead to difficulties for the banks as they battled increased loan to value ratios for their existing loan books and lower levels of borrowing necessary for new home loans.
Finally, there is still uncertainty as to which of the recommendations from the recent Financial Systems Inquiry (a.k.a. the Murray report) the government will adopt and the impact of these on the banks. If forced to increase their capital levels as a method of protecting themselves against credit crunches such as the GFC, the banks return on equity would likely be hit as they reduce the proportion of lending relative to capital held.
