ASX banking shares have been on fire this year. ASX Banks like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) are up double digits from the start of the year and National Australia Bank Ltd (ASX: NAB) has been able to net a YTD return of nearly 21%, despite cutting its dividend in May. So can this run continue? Or is it too late to buy the banks?
Why have ASX banking shares raised the roof this year?
Flash back to this time last year and it was a brutal time to be a banker. The banking Royal Commission was in full-swing and we were hearing on a weekly basis how banks been systematically ripping their customers off, charging dead people fees and lying to the corporate regulators.
It quickly became clear that all of the banks would have to pay-out huge sums of compensation and deal with reputational damage for years to come. What was unclear was what the Commission would recommend in terms of legal and regulatory changes.
In the end, there wasn't a whole lot to worry investors. Although there have been regulatory changes and more are coming, the government has outlined what it wishes to implement and there is nothing there that will seriously damage the ability of our banks to generate profits. Fines and compensation are of course detrimental to a balance sheet, but are also temporary and quickly forgotten. It has been this sentiment (in my opinion) that has driven the change of attitude towards banking and help lift share prices higher this year.
Can the banks keep it up?
While I think that the banks are now priced more or less at their intrinsic values, there is another factor that may continue to drive the prices higher – interest rates. With rates at record lows, returns from other investments like cash and bonds are fast becoming negligible. This has been and will continue to force investors seeking a solid rate of return into dividend-paying shares like the banks. After all, a 6.4% dividend from NAB shares (9% including franking) looks a whole lot better than a 1.9% NAB term deposit.
Foolish takeaway
While the 'Big Four' banks do offer yields that are very attractive, they are still exposed to the ups and downs of our economy and in particular our property markets. Our ASX banks are solid dividend stocks to be sure, but I would suggest looking at some of the other dividend payers on the market too.
