Is it time to buy bank shares?

The share prices of many banks are down considerably since the start of 2018, the Royal Commission has had an effect.

Shares of Commonwealth Bank of Australia (ASX: CBA) are down almost 15% since the start of January this year. Other banks like National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Group (ASX: WBC) are all down too.

With the main Royal Commission hearings out of the way, as well as the Interim Report, a lot of the issues have been brought to light. Perhaps there’s less unknown downsides now?

The banks have been told to increase their capital buffers and make themselves ‘safer’. Being safer is a positive through a whole cycle.

Many of the potentially-troubling subsidiaries of the banks are being sold off, such as the recent ANZ sale to IOOF Holdings Limited (ASX: IFL).

Perhaps the worst is over and the banks are now buys? After all, they have very attractive grossed-up dividend yields:

Commonwealth Bank’s yield is 8.8%.

Westpac’s yield is 9.9%.

NAB’s yield is 10.4%.

That’s a lot better than what you can earn from one of their savings accounts!

House prices going down isn’t necessarily a bad thing, as long as people keep paying their mortgages. The problem is that many borrowers may have overextended themselves with interest-only loans that they can’t afford. No-one is sure if it’s the banks’ problem due to reliance on the HEM, or if it’s ‘liar loans’ according to UBS.

Loan arrears are ticking up and Sydney & Melbourne prices are heading down. Bank bad debts are at cyclical lows and could trend upwards.

It would only take a small amount of capital growth and consistent dividends over the longer-term to generate returns of more than 10%. But, a danger is that the additional capital buffers (and any Royal Commission recommendations) could make the banks permanently less profitable, albeit safer.

If you really want to buy bank shares then buying shares of Bank of Queensland Limited (ASX: BOQ), Suncorp Group Ltd (ASX: SUN) or Mystate Limited (ASX: MYS) could be an idea. Although they are still exposed to Western Australia, Victoria and New South Wales at least their home states of Queensland and Tasmania home markets are holding up, which hopefully means less loan arrears.

Foolish takeaway

I’m looking to beat the market, I don’t think that any of the banks are going to be market-beating ideas over the next few years, even at the current lower prices. There are better growth shares out there.

For example, these top growth shares would be much better bets for your portfolio in my opinion.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of MyState Limited and 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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