Should you buy the Big Four banks at their current share prices?

Shares of each of the Big Four banks have rebounded from their recent lows, yet remain considerably below their high levels from earlier this year. According to one leading fund manager, that’s reason enough to buy.

As cited by The Australian Financial Review, Clime Asset Management’s John Abernethy says all four banks remain oversold and are ripe for purchase in what is “an abnormal sharemarket.”

In fact, he thinks investors could earn a 12% return per annum over the next two years (including the impact of dividends and franking credits) by buying the banks, especially on days where the banks’ share prices all fall due to short-term gyrations, just as they did on Friday last week.

Indeed, history has proven that one of the best times to buy shares of high-quality companies is when the market becomes uneasy or scared, and when shares are subsequently sold off. That certainly happened earlier this year when all four banks fell into an official ‘bear market’, which is defined as a fall of 20% or more from their peaks.

Notably, National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) remain in a bear market, their shares trading 24.4% and 27.2% below the high levels they achieved earlier this year. Commonwealth Bank of Australia ASX: CBA) and Westpac Banking Corp (ASX: WBC) are faring slightly better, but still remain 16.6% and 18.4% below their highs.

Also supporting Abernethy’s argument is that local interest rates are likely to remain low for the foreseeable future, and could even be cut again by the Reserve Bank of Australia’s board early next year. This could help the banks to grow their loan books whilst keeping loan impairment charges to a minimum.

In saying that however, there are also numerous reasons why investors should be cautious of the banks’ shares, even at their current prices.

To begin with, the banks’ shares remain pricey based on historical standards at a time where earnings growth is tipped to stall. Competition across the sector is red hot which is impacting the banks’ net interest margins (the profits they earn on the loans they write) while regulatory bodies are also stepping in to ensure their lending standards are maintained.

While that is a good thing as far as macro-economic security is concerned, it’s not good for the banks’ level of returns. In fact, while they are being forced to hold more capital it could result in further dilution of shares on issue while it could even impact their dividend payouts in the future.

Should you buy?

All four of Australia’s major banks represent high-quality businesses that deserve a position in your portfolio, but only for the right price. Indeed, the banks are cyclical in nature and often present as reasonable buys when the economy itself is struggling, just as it was back in 2008-09 during the Global Financial Crisis.

Although there is a chance the banks’ shares could rise in price from here, I personally think there are far greater opportunities investors should look to capitalise on today that don’t carry the same risks associated with the big four banks right now.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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