Buyer beware! Why Macquarie just downgraded the big four ASX 200 banks

Banks may have gotten too expensive.

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Analysts at Macquarie are not a fan of the valuations of the large S&P/ASX 200 Index (ASX: XJO) bank shares, having just given them a rating downgrade.

It may be a coincidence, but the share prices of all of the major banks are down today. The National Australia Bank Ltd (ASX: NAB) share price is down 3.5%, the Westpac Banking Corp (ASX: WBC) share price is down 4.1%, the ANZ Group Holdings Ltd (ASX: ANZ) share price is down 3.6% and the Commonwealth Bank of Australia (ASX: CBA) share price is down 1.7%.

What did Macquarie say about the ASX 200 bank shares?

Macquarie already rated CBA shares as underperform, and decided to call ANZ shares, Westpac shares and NAB shares as underperform too.

According to reporting by The Australian, the ANZ price target is now $27, NAB has a price target of $32.50, Westpac has a price target of $26 and CBA has a price target of $95.

A price target is a broker's estimation of where a share price will be in 12 months.

Based on those numbers for the ASX 200 bank shares, ANZ shares are predicted to fall 6%, NAB shares are predicted to drop 2.3%, Westpac shares are projected to fall around 1% and CBA shares could drop 17%.

Macquarie analyst Victor German said:

Banks are trading at peak multiples without a clear fundamental reason. We downgrade all banks under coverage to Underperform.

We believe the economic and stock-specific settings that underpinned banks' outperformance during previous rate cut cycles are not evident.

We see limited scope for banks to surprise in the medium term and hence see limited fundamental reasons for a structural re-rating.

Do ASX share deserve their higher valuation?

The broker UBS recognises that valuations are higher than they used to be, though the profit may also be higher quality. According to The Australian reporting, UBS analyst Richard Schellbach said:

Equity earnings have proved to be more secure, and of higher quality, than we had previously assumed.

Maybe investors no longer deserve, or require, the same level of compensation to take on equity risk. The reason for this is that equity earnings have shown themselves to be more dependable than we assumed.

Despite the possible higher quality of earnings, Schellbach doesn't think we're about to see a multi-year bull market, including for ASX 200 bank shares. He said:            

Bank PEs were under 8 times in early 1995 versus 16 times now. The reality is that the current rate hiking cycle never saw equities de-rate anywhere near to the extent which they did in 1994.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Macquarie Group. The Motley Fool Australia has positions in and has recommended Macquarie Group. 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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