Are ASX 200 bank shares too expensive to buy right now?

Could the tide be turning for ASX 200 banks?

| More on:
Man sitting in front of a laptop and analysing an earnings report.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

ASX 200 bank shares have enjoyed robust shareholder returns ranging from 30% to 45% over the past year.

Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) all notched respective gains following a strong show of earnings. Meanwhile, ANZ Group Holdings Ltd (ASX: ANZ) had a similar run.

Despite this, the big four banks may not have much room to grow into their currently elevated share prices, according to Macquarie analysts.

And the fact of the matter is the banking majors are all trading at or near six-month highs. So, is now a good time to buy ASX 200 bank shares? Here's a closer look.

Macquarie weary on ASX 200 bank growth

Macquarie analysts caution that ASX 200 bank shares may struggle to grow into their elevated multiples over the next few years.

According to The Australian, Macquarie says visibility for the sector is low as pressures on earnings mount. According to the reporting, the firm said:

Looking forward, we do not see a clear path for underlying profitability to improve meaningfully from a top-down and divisional bottom-up perspective.

We note that banks' current returns are broadly in the middle of their 10-year average ranges. As a result, we see limited scope for banks to grow into their elevated multiples

The broker notes that, despite each of the banks delivering double-digit total shareholder returns over the past year, their earnings have declined, while multiples have expanded "to a 15-30% relative premium [in price-to-earnings ratio (P/E)] versus five-year historical averages".

Macquarie also observes that banks are currently experiencing one of the lowest bad debt periods on record, which may not support an earnings recovery in the medium term.

In H1 FY24, the banking majors booked a total of $1.21 billion in impairment charges, a 13% decrease from the prior corresponding period.

Despite this, bank share prices have continued to rise. But further growth from here could be a challenge, Macquarie says:

While multiple expansions often precede the earnings growth phase, this is an improbable outcome, in our view. Periods where the earnings subsequently lifted to support rallying share prices were generally characterised by normalising credit losses following an impairment cycle

Banks were strong in FY24

ASX 200 banks showed strong returns on the charts, and the fundamentals remained robust throughout the year.

Commonwealth Bank shares were up 27% in FY24 as the company reported half-yearly profits of $13.7 billion. According to my colleague James, growth softened towards the end of the year, with a 1% decline in earnings reported for its Q3 FY24 numbers.

Westpac shares gained 30% in FY24, driven by general market strength and positive operating results.

The bank's half-year results in May showed a 16% decrease in net profit to $3.3 billion, yet investors welcomed the 7.1% increase in the interim dividend to 75 cents per share, alongside a fully franked special dividend of 15 cents per share.

Meanwhile, NAB shareholders must have been happy, as the bank delivered a massive return in FY24. According to my colleague Sebastian, NAB shares started the year at $26.37 each and closed at $36.23, a capital gain of 37.39%.

Including dividends, investors enjoyed a total yield of 6.33%, resulting in a 43.7% total gain.

Foolish takeaway

ASX 200 bank shares have delivered impressive returns in the past year, but analysts warn that their current valuations may be too high. Remember to conduct your own research and consider any long-term goals before making any investment decisions.

Motley Fool contributor Zach Bristow 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.

More on Bank Shares

Delighted adult man, working on a company slogan, on his laptop.
Bank Shares

NAB share price hits 9-year high amid yet another strong day for ASX 200 banks

Bank stocks just keep on rising...

Read more »

Man raising both his arms in the air with a piggy bank on his lap, symbolising a record high.
Bank Shares

Westpac and three other ASX 200 bank shares smashing new multi-year highs today

If you own ASX bank shares, you're probably having a great day.

Read more »

A woman in a bright yellow jumper looks happily at her yellow piggy bank representing bank dividends and in particular the CBA dividend
Bank Shares

Is now the time to take some profits on CBA shares?

CBA shares have been an excellent performer for their holders.

Read more »

A man in a suit smiles at the yellow piggy bank he holds in his hand.
Bank Shares

Prepare for earnings! What ASX bank share buyers can learn from Wells Fargo results?

Upcoming ASX bank earnings: US reports may offer a hint.

Read more »

a happy child dressed in full business suit gives the thumbs up sign while sitting at a desk featuring a piggy bank and a sack of money with a dollar sign on it.
Bank Shares

Here's why BOQ shares could be on the verge of a turnaround

BOQ has seen a lot of pain in the past three years.

Read more »

Elderly couple look sideways at each other in mild disagreement
Bank Shares

Why mum and dad investors aren't buying ASX bank shares like they used to

What’s causing Aussies to be turned off banks?

Read more »

A beautiful ocean vista is shown with a woman whose back is to the camera holding her arms up in triumph as she stands at the top of a rock feeling thrilled that ASX 200 shares are reaching multi-year high prices today
Bank Shares

CBA share price rallies to become the new top dog on the block

CBA shareholders can feel even wealthier after reaching the top of the list.

Read more »

A man and a woman sit in front of a laptop looking fascinated and captivated.
Bank Shares

3 reasons everyone's talking about CBA shares this week

CBA has been blazing new territory this week in more than one way.

Read more »