Are the banks a sell?

The dividend yield of the big four banks Australian and New Zealand Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX:NAB) and Westpac Banking Corp (ASX: WBC), is the only sweetener.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The recent 1H18 results released by Australian and New Zealand Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) were disappointing according to a report by UBS. The outlook ahead is undoubtedly tough, notwithstanding the Royal Commission into banking. 1H18 earnings per share for the big four fell an average 3.7%, due to slowing credit growth, and rising costs from National Australia Bank's restructuring and Commonwealth Bank's provisions for anti-money laundering fines and compliance. Stressed exposures were up as well as increasing number of mortgages in arrears. On the positive side, there was improved asset quality with less corporate losses and ongoing recoveries, and net interest margins expanded due to mortgage repricing.

UBS says that management commentary on the outlook was more cautious than has been seen for a long time. Average dividend yield for the big four of 6.2% is hard to ignore and the big four average valuation is not expensive at 13x FY19 earnings, but the increasing risks lead to UBS taking a very cautious view.

UBS's reasons to be cautious on the banks are:

  • Tighter credit standards
  • Slower credit growth
  • Higher funding costs
  • Lower net interest margins due to competition and resetting of interest only loans
  • Rising legal and compliance costs.

Of the four major banks, Westpac is trading on the lowest forward price-earnings-ratio (PER) of 12.3x at the time of writing, and is paying an annual dividend yield of 6.4%. While both National Australia Bank and Commonwealth Bank are trading on a forward PER of 12.6x and annual dividend yield of 7% and 6.1%, respectively, while ANZ is trading on a forward PER of 13x with an annual dividend yield of 5.7%.

Motley Fool contributor Rosemary Steinfort owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia and Westpac Banking. 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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »