ASX 200 bank shares delivered mixed results in the first half of 2024, and views on the sector's outlook are also divided.
The S&P/ASX 200 Banks Index (ASX: XBK) has had a notable year, up almost 13% year-to-date. Not yesterday, though. The banking basket slipped into the red by around 40 basis points at the close of trading on Wednesday.
The big four banks — National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group Ltd (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), and Westpac Banking Corp (ASX: WBC) — were down less than 1% on Wednesday, but have trended lower generally these past three months.
With the pullback, are ASX 200 bank shares still a smart investment?
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What's happening with the big four ASX 200 bank shares?
All four banking majors trended lower yesterday amid a broader market selloff. The benchmark S&P/ASX 200 Index (ASX: XJO) drifted around 0.5% into the red at Wednesday's close, similar to the banking index.
However, over the past year, investors who held ASX 200 bank shares have outperformed the broader market.
The benchmark index has lifted around 1.5% in the past year. Meanwhile, the banking sector is up 12.5% – an 11% advantage.
What are experts saying?
Despite these gains, some analysts are concerned about valuations in the sector. Goldman Sachs is one of those parties. It believes offshore banks might be more attractive to those interested in the space.
In 2015 for example, the average Australian bank's return on equity (ROE) was among the highest globally, the broker notes.
However, from 2015 to 2023, the ROE and return on tangible equity (ROTE) have declined significantly. Now, they rank among the lowest globally.
Goldman Sachs states, "Australian banks now actually earn the lowest ROTE of global comparable banks." This decline is due to compressed net interest margins and reduced low capital-intensive non-interest income.
Goldman Sachs rates Commonwealth Bank and Westpac as sell. It cites valuation concerns and risks in technology disruption for the view on these two ASX 200 bank shares. "We don't think [Commonwealth Bank] justifies the extent of its valuation premium to peers," it noted in its sector analysis.
It has a neutral rating on NAB due to the balance of solid fundamentals but challenging valuations. ANZ meanwhile gets a buy rating for its productivity benefits and improved profitability in its institutional business.
Meanwhile, Airlie Funds Management has reportedly trimmed its position in CBA, supposedly "the most underweight CBA in the history of [the] fund", according to The Australian Financial Review.
This is despite shares in the banking giant climbing 28% in the last 12 months and last week nudging a 52-week closing high of $124.85.
Citi has some positive comments on CBA — despite rating it a sell. It said the bank's exposure to, and performance in, retail banking may be enough to "justify continued outperformance versus its peer group", the AFR reports.
Citi added ASX 200 banks look to be priced at a premium above "core earnings growth fundamentals".
Valuation concerns
Despite poor ROE and ROTE performance, Australian banks' price-to-book multiples remain high, making them some of the most expensive banks globally, Goldman Sachs explains.
Australian banks are currently trading at the 96th percentile versus history on a ROE vs. price-to-book multiples basis. The valuation discrepancy has expanded despite weaker relative profitability.
Here is the current list of consensus recommendations for each of the banking majors, with the respective number of buys making up that view:
- ANZ – Hold (7 buys)
- CBA – Sell (4 buys)
- WBC – Hold (4 buys)
- NAB – Hold (2 buys)
- (All recommendations per CommSec)
Notably, despite the consensus view, each of the ASX 200 banking shares still shows a drop in positivity.
Takeout on ASX 200 bank shares
ASX 200 bank shares have shown strong returns over the past year. However, investors are wise to be cautious, in my view. With concerns about overvaluation and economic headwinds, experts warn it's essential to consider valuations and profitability in the sector.
As always, you should consider your own personal financial circumstances before any investment decisions.
