Over the last three years, the big four Australian banks Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) have dominated the headlines and seen their shares lose a quarter of their value.
Since March 2015, the CBA share price is down 24%, Westpac down 27%, ANZ down 25% and NAB down 23%. This is all in a period where interest rates have decreased, plans to grow through their wealth management divisions have been curtailed, concern over the housing market has increased and regulatory pressure on the banks has mounted.
Despite that, one can’t help but be tempted by the banks. After all, they do boast of dividend yields above 6%, PE ratios below the market average and higher ROE’s than most banks globally.
So are the ASX bank shares too cheap to ignore?
I think it depends on the following scenarios:
- Yield vs Growth. From a dividend yield perspective I think the banks have a role to play in a well-diversified portfolio. I wouldn’t consider them however if I was looking to build a multi-bagger growth portfolio.
- Short term vs long term. In the short to medium term, I think there could be more headwinds for the banks as the fallout from the royal commission continues. There is also the risk of higher loan defaults as borrowers struggle with high mortgage debt. In the long run, I think these bank will remain dominant oligopolies but with a bigger market to share due to the rising population.
- Exposure. Given their size, the banks constitute a large proportion of the ASX 200 and their performance is highly correlated as they are affected by the same macroeconomic factors. As such I wouldn’t consider opening a large position particularly if I already had exposure to the financial services sector through other top performers such as Macquarie Group Ltd (ASX: MQG).
All things considered, I think a small position in the banks as part of a diversified income portfolio held for the long term would be a good idea. My number one dividend pick however would be this top dividend stock selected by our team of experts.
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You can follow Kevin on Twitter @KevinGandiya.
The Motley Fool Australia owns shares of National Australia Bank Limited. 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 Scott Phillips.