Some investors think that the ASX banking sector might actually be the best place to invest at the moment.
I can kind of understand why they would say that.
Retail conditions are quite tough right now, making it difficult for businesses like Wesfarmers Ltd (ASX: WES) and Scentre Group (ASX: SCG). The same could be said for construction companies.
Growth shares are valued at a high levels such as WiseTech Global Ltd (ASX: WTC) and Pro Medicus Limited (ASX: PME).
Resource shares are notoriously cyclical and we could be at the top of the cycle for businesses like BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO).
A declining interest rate has sent shares like Transurban Group (ASX: TCL), Sydney Airport Holdings Pty Ltd (ASX: SYD) and Telstra Corporation Ltd (ASX: TLS) up a lot over the past year.
Therefore, do the valuations and dividend yields of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) mean they're the best choice?
There seems to be more confidence about lending. The job market is still in a good position. The interest rate reductions could help reduce the danger of rising mortgage arrears for banks.
Commonwealth Bank is trading at 16x FY20's estimated earnings, Westpac is trading at 12.6x FY20's estimated earnings, NAB is trading at 12.6x FY20's estimated earnings as well and ANZ is trading at 11.7x FY20's estimated earnings.
I have two main issues with investing with banks for the long-term for my portfolio. First, they have huge balance sheets, a large amount of assets and liabilities can go wrong for a business with terrible consequences, as we see in recessions – particularly in the GFC.
The other is that lending is becoming increasingly like a commodity where customers can compare against a wide array of loan products. I see this as a key reason why the net interest margin (NIM) of banks has been dropping and could go even lower over time.
Foolish takeaway
So, whilst the banks may seem decent value, I think there are risks that can't be ignored.
