Are bank shares a bargain?

Source: Australian Broadcasting Corporation

Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and Commonwealth Bank of Australia (ASX: CBA) have been on a wild ride in 2016. One look at the graph below is all you need.

Source: Google Finance

Source: Google Finance

But just yesterday, at one time or another, each of the ‘Big 4’ banks would have featured in a top 10 losers list on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

In contrast, today they’re thumping the market!

What’s going on with big bank shares?

On Monday morning, Westpac dropped its half-year results on the market showing a 5% rise in revenue and lesser profit growth. The market went into a frenzy, selling down each of the major banks.

Today, ANZ Banking Group revealed a somewhat unexpected 24% drop in profit. Impairments ran higher, profitability slipped, the dividend was cut and the market outlook wasn’t pretty. Yet – strangely – shares are running higher. Maybe ANZ’s fall in profit wasn’t so bad after all?

Next up is NAB, which reports its half-year results on Thursday, May 5.

Are bank shares a bargain?

Upon studying Westpac’s results, a shrewd analyst may interpret its strong asset (i.e. loan) growth as ‘aggressive’. And when combined with falling profitability, it may not be such a stretch to assume that competition is fierce in the banking sector. With mortgage brokers, regional banks and non-bank lenders on the prowl for new sources of growth, a slowing property market means more competition and lower margins.

ANZ’s results hinted at patchy areas in the economy, particularly in those industries affected by or associated with resources.

Regulatory risk also remains a key challenge for bank managers. Not only does more shares on issue translate to stunted dividend growth (at least in the immediate/medium term), profits are also being diluted – causing earnings per share to fall. And in the share market, price follows profit.

The challenge for investors, as always, is weighing up all of these macroeconomic, company and industry-specific headwinds to make an informed assessment on the valuation of each bank’s shares.

Personally, the risks are too great for me to label bank shares a ‘bargain’.

Foolish takeaway

As fellow Motley Fool contributor Edward Vesely wrote this morning, the likelihood of a meaningful return to consistent share price growth from the major banks in the immediate future appears quite low. Along with other risks potentially disrupting the banking sector it may worth staying on the sidelines, for the foreseeable future at least.

Rather than buy bank shares, I'm looking for other - faster growing - dividend shares to add to my portfolio, like the one The Motley Fool's expert analysts hand-picked as their best dividend share idea for 2016.

Indeed, our resident dividend experts named their Top Dividend Share for 2016. Not only are the shares dirt cheap, the company is growing and trading on a 5.6% fully franked dividend yield. Simply click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required!

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @ASXinvest.

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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