The big four banks are popular investments among ASX investors.
Historically, known for their high dividend yields, they have been a staple in many investors' portfolios.
However, recently, the big four banks have risen significantly, leading many experts to warn that they are overvalued or fully valued.
This narrative has been particularly applicable to Commonwealth Bank of Australia (ASX: CBA). However, with CBA shares trading more than 13% below their peak, investors may be wondering whether they are now attractively valued.
In a new research note, The New Normal, Macquarie Group Ltd (ASX: MQG) explored trends that have driven the Australian banking sector's recent run and provided upgraded price targets for the big four banks.
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Trends and the 'new normal'
Macquarie said credit quality has driven upward revisions to bank earnings over the past five years.
The broker expects this to continue, given the rate-cutting cycle:
Indeed, with rate cuts now supporting a cyclical pickup in the economy, and asset prices rising again, it's hard to justify a material rise in loan losses in the near-term.
Macquarie cited several factors that have contributed to lower impairments:
We think multiple factors have combined to reduce the risk within the banking system over the last 10 years, including: (1) a significant tightening in underwriting standards, (2) better data and risk management, (3) a material shift in how banks manage troubled loans, and (4) the rise of private credit which has acted as an exit ramp from the banking system.
Macquarie expects these conditions to persist, contributing to lower losses in the near term.
What are the big four banks worth?
Given this view, investors may be eyeing an investment in the big four banks.
Macquarie upgraded earnings per share (EPS) targets by 2% to 6% over the next few years.
As a result, price targets for the ASX banking sector were revised by 1% to 5%.
However, at current share prices, the broker does not consider them to be attractively valued.
Macquarie has upgraded its price target on CBA shares from $105 to $106. Given that CBA shares closed at $166.87 yesterday, this suggests material downside from here. Macquarie continues to assign CBA shares an underweight rating which it has maintained since January 2023.
Macquarie also upgraded its price target on Westpac Banking Corp (ASX: WBC) shares from $30 to $31. This also remains well below the current share price of $38.84. In February 2024, Macquarie had an outperform rating on Westpac shares, making it the clear pick among the big four banks back then. However, since then it has maintained an underperform rating.
Similarly, ANZ Group Holdings Ltd (ASX: ANZ) was upgraded from $31 to $32.50, while the price target for National Australia Bank Ltd (ASX: NAB) was increased from $35.50 to $37.50. Macquarie continues to rate both ANZ and NAB shares as neutral.
Foolish Takeaway
Despite Macquarie upgrading the price targets for the big four banks, the broker is yet to consider them to be attractively valued.
Justifying this position, Macquarie said:
While our BDD forecasts are now ~10-20% below consensus, we still think consensus is not fully capturing the effect of lower rates on bank margins; our cash earnings forecasts remain 1-2% below consensus in FY26E and 4-6% below in FY27E. In addition, while reduced impairments put less pressure on dividends, with credit growth remaining solid, we continue to see risks to capital. Given this and the weak revenue outlook, we remain Underweight the banks sector, with ANZ and NAB (both Neutral) remaining our preferred exposures.
This suggests those looking to buy shares in the big four banks should wait for a more attractive entry point.
