Most Australian investors have been impacted by the sharp decline in the big bank stocks over the last six months.
Indeed, the 'Big Four' are all among Australia's biggest, and most widely-held companies. Any investor who has held onto their shares during the period has taken a hit – especially those with a heavy portfolio weighting towards the financial sector.
Even those investors who don't own the banks are likely to have been impacted. Given the banks' heavy weighting on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), their decline has acted as a drag on most other companies trading on the ASX with the benchmark index down nearly 16% from its peak in April.
The banks have been hit even harder than that, with all four trading in an official "bear market" – defined as a fall of 20% or more:
- Australia and New Zealand Banking Group (ASX: ANZ), down 26%
- Commonwealth Bank of Australia (ASX: CBA), down 23.2%
- National Australia Bank Ltd. (ASX: NAB), down 22.7%
- Westpac Banking Corp (ASX: WBC), down 23.4%
However, investors are now beginning to wonder if the banks have been oversold, and whether now could be a good time to jump back in. Many also assume that because the banks have historically generated enormous returns for investors, the same will hold true in the future. This isn't necessarily the case, and investors shouldn't rely too heavily on that assumption.
All four of the major banks have enjoyed fantastic economic conditions in recent years, whereby low-interest rates, plummeting bad debt charges and growth in loans have combined to produce record-breaking earnings results. While the banks could still benefit from these tailwinds in the near future, they won't last forever.
Already we've seen that earnings growth is becoming more difficult to achieve – especially due to the tough competition for new customers – while low-interest rates and record low bad debt charges won't last forever. In fact, bad debt charges may have already hit a low and could soon act as a drag on overall earnings capability within the sector.
Should you buy?
The banks may have fallen considerably in price, but they needed to. Before their demise, all four were trading at outlandish prices and had been for some time.
Although they are far more compelling at today's prices than they were, I still don't believe they present as good buys. Indeed, there are headwinds facing the Australian economy which could impact their earnings potential while their valuations are simply too lofty to warrant new capital today.
There is no questioning the quality of any of the banks, and all four could make excellent purchases at the right price. At this point, however, I believe there are far more compelling opportunities currently on offer for those investors who know where to look.
