Australia's biggest banks have been amongst the hardest hit during the recent crash, leaving many investors to wonder whether or not now is the time to buy.
While the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is hovering 12.9% below its April high, all four banks remain in an official bear market, defined as a 20% fall from their recent highs. Australia and New Zealand Banking Group (ASX: ANZ) has been the worst hit, with its shares down 23.4% at $28.54.
At the same time as share prices have fallen however, earnings have risen, as have the banks' lucrative fully franked dividend yields. ANZ now offers a 6.4% fully franked dividend, while National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA) yield 6.3%, 5.9% and 5.5%, respectively.
With interest rates sitting at just 2 per cent – and likely to fall even lower – those yields are certainly appealing. As an addition, the weak Australian dollar could attract some foreign investors back to the market to push up the banks' share prices.
Indeed, there's no doubt that the banks are more attractive now than they were five months ago, when share prices were hovering at all-time or multi-year highs. But I still don't believe they're a reasonable buy just yet.
Sure, demand for the banks' dividend yields could provide some support to their share prices in the near term, but the businesses themselves are facing strong headwinds which could significantly impact their ability to grow earnings, and even maintain their dividends.
To begin with, the benign bad debt that the banks have enjoyed in recent years has been the driving force behind the banks' record-breaking earnings results. But bad debt is now at a historic low level and bound to reverse course in the near future, ultimately weighing on earnings.
Similarly, competition between the banks is taking its toll on net interest margins (the level of profit on loans written) and tougher capital restrictions – likely to be set by the Australian Prudential Regulation Authority – could impact return on equity (ROE) and perhaps even dividends per share.
Despite their solid dividend yields, investors may want to hold off from buying the banks' shares until they fall even further in price. In the meantime, there are plenty of other compelling opportunities that could yield even greater long-term rewards.
