Buying ASX 200 bank stocks? Here's why they could keep outperforming

Investors who sold their ASX 200 bank shares last year have missed out on some very hefty gains.

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You don't have to search long to find a broker or analyst with a bearish take on S&P/ASX 200 Index (ASX: XJO) bank stocks.

As one example, in late April, Citi suggested that all of the big four banks were sells.

It's not that most of these bearish analysts don't see the big four banks as high-quality assets with ongoing potential, mind you.

It's largely that many analysts believe Australia and New Zealand Banking Group Ltd (ASX: ANZ), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA) shares are simply overvalued.

With a price-to-earnings (P/E) ratio of 20.9 times, CBA shares tend to catch the most flak.

As you should be aware, various brokers have been calling CBA overvalued relative to its peers for years now. That didn't stop the ASX 200 bank stock from notching fresh all-time closing highs of $122.26 a share on 16 May.

For the other big four banks, Westpac stock trades at a P/E ratio of 14.9 times, NAB stock trades at a P/E ratio of 15.6 times, and ANZ stock trades at a P/E ratio of 12.7 times.

Today's P/E ratios have increased since this time last year, as the big four banks' share prices have gained faster than their comparative earnings.

Over the past 12 months, the ASX 200 has gained 5.8%.

Here's how the big ASX 200 bank stocks have performed over that same time (excluding their dividend payouts):

  • CBA shares are up 19.2%
  • NAB shares are up 26.5%
  • Westpac shares are up 23.0%
  • ANZ shares are up 18.8%

With those kinds of gains already in the bag, can the big banks keep outperforming?

Why ASX 200 bank stocks could surprise to the upside

Hugh Dive, chief investment officer at Atlas Funds Management, has 'overweight' positions in ANZ, Westpac and Macquarie Group Ltd (ASX: MQG) in the Atlas Australian equity portfolio.

And as The Australian Financial Review reports, Dive doesn't think it's a good idea for investors to be 'underweight' in ASX 200 banks stocks right now.

According to Dive:

A lot of analysts have called to sell all the banks a month ago, and if you'd followed that advice, you'd be one of the worst performing fund managers.

You're fighting against increasing dividends in the banking reporting season and also buybacks which are pushing up share prices…

Those 'sell everything' calls are based purely on valuations, but not understanding what's going on in the economy and markets.

As for what's happening in the economy, the banks have broadly beaten consensus expectations regarding non-performing loans this year, despite households struggling with sticky inflation and elevated interest rates. Net interest margins have also held up better than expected.

Then there are the juicy, franked dividends the banks are paying out, which look to be drawing the interest of passive income investors.

And as Dive points out, the billion-plus dollars in share buybacks conducted by all of the big four ASX 200 banks stocks, with more expected, is also helping drive share prices higher.

With fewer shares in circulation, the remaining shares each offer a larger slice of the banks' businesses.

"As a fund manager, I never want to be on the other side of a company when it's buying back stock, especially when the quantum of the buybacks are quite significant," Dive said.

Motley Fool contributor Bernd Struben 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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