Are big bank shares the best value trade on the ASX?

You’d be hard pressed to find blue-chip stocks outside of Telstra Corporation Ltd (ASX: TLS) that are as depressed as the big four banks, but professional investors are increasingly voicing their support for the embattled sector as the valuation for the broader market looks increasingly stretched.

The share prices of Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) are wallowing in the red while the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 9%.

Shareholders might be disappointed to learn that even over the longer-term, investing in bank stocks has been a losing game with three of the big four, excluding Commbank, losing 1% to 10% of their value over the last five years.

Commbank is around 4% in the black but that still feels like a loss when you consider the ASX 200 is up 22% over the same timeframe.

But sentiment may be turning as investors are increasingly having difficulties finding good value stocks to back in this bull market.

The boss of Argo Investments, Jason Beddow, told the Australian Financial Review that he believes the share prices of the big banks have bottomed and a new piece of shocking news is needed to bring the sector down.

The banks have been knocked lower by revelations at the Royal Commission, a falling housing market, weak household balance sheets, slowing credit growth and tighter scrutiny of their lending standards.

All these appear to be factored into the current share prices of the banks and Commbank’s earnings results supports this view. Shares in our largest mortgage lender rallied on the day management revealed that it had missed profit expectations.

Fidelity International fund manager Paul Taylor expressed a similar view to the AFR as he cautioned investors on being too negative on bank stocks. He thinks the Royal Commission may turn out to be a good thing for the sector if it increases regulatory scrutiny as that will deter competition.

There’s no arguing that on a valuation basis, the big banks are looking cheap. They are on a price-earnings (P/E) multiple of round 12 times and that’s around a 15% discount to the broader market if you excluded resources and banks.

The views support my belief that we are close to a turning point for the banks. I’ve written before that I am underweight on the sector but that this reporting season could prove to be one of the triggers for a rebound in the sector.

I think it’s still a little early as I want to see a decline in the pace of the slide in property prices. That’s the last piece of the puzzle before I step back into the sector.

Right now, the drop in property prices is still accelerating but I am significantly less bearish on the sector than at any point over the last year.

It’s worth keeping a close eye on the sector.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, Telstra Limited, and Westpac Banking. The Motley Fool Australia owns shares of and has recommended Telstra Limited. 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.

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