Commonwealth Bank of Australia (ASX:CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) account for 28% of the Australian share market, or S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
That means, almost every commentator or fund manager is paid to have an opinion on the banks.
Nonetheless, I think it is important to hear a range of views — for and against — to ensure your investment thesis stacks up.
My #1 Big Bank Stock for 2017
Before I get to my top bank pick of 2017. I'll stare into my crystal ball and see what it says is in store for the banking sector in broader terms throughout 2017.
My big guess is that official interest rates won't move. However, interest rates on mortgages, credit cards and commercial loans will rise.
Remember, the banks can do just about whatever they want with their interest rates. Chances are, they will raise loan interest rates faster than deposit rates, which will help widen their profit margins. This has already begun.
Such a dislocation between official interest rates and bank interest rates may provide the impetus for the Reserve Bank of Australia (RBA) to consider higher rates in 2018. But that's another story.
Going one step further, I think that despite the banks' attempts to increase their profit margins they are unlikely to see much of that income fall to the bottom line (profit), because I think we have past the cycle's low point in bad debts and delinquent loans.
The banks will continue to lower their headcount and invest in technology. In my opinion, they have to do the latter — if they plan to be around in 10 years.
Now, for my top bank stock.
Commbank shares would be my pick of the bunch except they are expensive. At 2.3 times its value of assets its shares are 23% more expensive than its next most expensive peer, Westpac. Moreover, it offers a lower dividend.
Westpac is neither here nor there for me because it lacks the catalysts of its two smaller peers (see below) and its shares do not appear to represent blockbuster value at today's share price. Westpac has levers it can pull to drive growth, but it's not my pick of the bunch.
Quietly, the ANZ share price has been the best performer of 2016 thus far – rising 8% – which is perhaps a little surprising to some investors.
Indeed, given the issues it has endured in 2016 (such as being under the regulatory spotlight and the woes of its Asian strategy) you would be easily mistaken for thinking its shares have underperformed. With the lowest valuation of the big four, a 5.3% dividend yield fully franked and a number of catalysts for change, ANZ could quite easily be next year's best-performing stock.
However, my pick of the bunch is NAB. It has a low valuation, as measured by book value, and the biggest dividend yield.
But not only that, following some tough decisions, a huge capital raising and divestments, NAB is now more lean, efficient and focused. Moreover, it appears well capitalised for regulatory changes, which we will likely hear more about in the second half of 2017.
Foolish takeaway
My view on the banks is predicated on the belief that you should not be overexposed to the sector. Yes, the big banks have an implicit guarantee from the government, but that does not extend to guaranteeing investors an adequate return.
Indeed, I think an ideal share portfolio would be equally balanced between Australian and international shares, with not more than 25% concentrated to the global banking sector.
And although I think NAB is the best banking idea for 2017, you need to consider multiple views and opinions before making any decision to invest.
