The big bank shares are a major presence in the Australian stock market, especially the S&P/ASX 200 Index (ASX: XJO).
Even if you don't hold any directly, if you own an Australian index exchange-traded fund (ETF) there is a good chance that your portfolio is exposed to the sector.
After 13 interest rate rises over the past couple of years, the big banks have all had a great excuse to boost their margins.
And investors have been flocking to them in recent weeks.
"Despite some grim economic forecasts, the share prices of Australian banks have performed well over the past three months," read a recent VanEck blog post.
"Commonwealth Bank of Australia (ASX: CBA) for example, recently hit an all-time high of $115.98 per share."
So is it a great time to buy, or even hold, bank shares right now?
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Bank shares priced for perfection
The opinion of the VanEck analysts is that the valuations for the major banks are now "stretched".
"Australian banks, on a global basis, are the most expensive in the developed world on a 12-month forward price-to-earnings and price-to-book basis."
The worry is that this latest rally indicates investors are pricing in the best-case scenario for the sector.
"While Australia's prospects for a soft landing have improved for 2024, the market seems to be pricing a dream scenario for the banks despite the risks of increased mortgage stress in a prolonged higher interest rate environment.
"It was also only a few months ago that banks were consumed by a mortgage price war."
Higher interest rates haven't been the party that investors were expecting
CBA is easily the best-performed bank stock in recent years. But it's not just that one that seems overcooked.
"Each of Australia's 'Big 4' banks face continuing headwinds in 2024," read the blog post.
"A subdued economic outlook and potential RBA rate cuts could see the Big 4 banks' net interest margins (NIMs) continue to deteriorate."
Despite the rate hikes, hot competition has meant margins haven't actually expanded that much. If anything, they're already on the way down.
"A reduction in NIMs results in a reduction in cash earnings and will impair the Big 4's ability to increase dividend payments."
Indeed this is why the major banks are on the nose with professional investors at the moment.
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