One of the more consistent themes I hear regarding ASX bank shares is how Aussie investors seem to place a higher premium on them than investors in other countries do on their own banks. Everyone knows that most ASX investors love a good, fully franked dividend. And up until 2020, the ASX banks were a typical first port of call for this end.
But 2020 has brought a unique set of challenges to the ASX banks. In the face of the coronavirus pandemic, the dividends flowing from the banking sector have all but dried up. No doubt this is one of the key reasons we have seen ASX bank shares smashed over the course of the year. Commonwealth Bank of Australia (ASX: CBA) was a $91 stock early in the year. Today, it’s asking around $72. Westpac Banking Corp (ASX: WBC) used to be ~$26 back in February, today it’s $17.89. It’s a similar story with Australia and New Zealand Banking Group Limited (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB).
But investors are still buying our banks, perhaps as a bet on the future of the Australian economy, or else in the hope that the dividends will return in their former glory in the next year or two. So in order to help anyone weighing up the investing case for any of the big four ASX banks, I thought we could look at how each bank is priced today, and compare said prices to some international banks to see how they measure up.
How are the ASX bank shares valued today?
The price-to-earnings (P/E) ratio can be a flawed metric, but I think it is useful in comparing companies within the same sector to see how the market values their earnings. So without further ado, let’s take a look at the big four.
On current prices, Commonwealth Bank is commanding a P/E ratio of 13.11.
Westpac is trading at a P/E of 13.38.
NAB is sitting at 16.19.
And ANZ is resting on 12.52.
Let’s now check out some of the largest banks over in the United States to see how they compare.
The largest US bank is JP Morgan Chase. On current pricing, JPMorgan is asking a P/E of 13.47.
Next, Bank of America is at 9.77.
Wells Fargo is sitting on 29.09 (which looks like some kind of aberration in my view), while Citigroup is on 8.91.
Ok, that’s some of the US’s largest banks, but let’s branch out.
One of the United Kingdom’s largest banks is the Royal Bank of Scotland. It’s currently trading on a P/E ratio of 5.44. Another UK bank – Lloyds Banking Group – is asking 8.85 x earnings. One of the largest banks in Europe is ING. It has a P/E ratio of 6.
It seems the ASX banks do command some kind of premium when we compare them to other banks around the world. This might have something to do with the substantial benefits that a typical fully franked bank dividend used to provide to Aussie investors. But with the prospects of near-term bank dividends looking bleak, I don’t see much of a reason to invest in any of the big four ASX bank share prices today.
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Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited and JPMorgan Chase. The Motley Fool Australia has no position in any of the stocks mentioned. 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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