Analysts agree: the big four banks are expensive
Analysts are again questioning whether Australian banks are overvalued, after the financial sector led last week's sharemarket sell-off.
The big four banks have been trading near their historic valuation highs, with Commonwealth Bank's price-to-earnings ratio recently lifting to about 15.5 times its annual earnings.
Before last week's falls, CBA's share price had risen more than 50 per cent in 12 months. The share price closed at $68.19 on Monday, 38 per cent higher than last May.
CIMB analysts John Buonaccorsi and Ashley Dalziell said local banks were about 20 per cent overvalued on most fundamental ratios.
"Using the Gordon growth model, current market pricing implies the Australian bank sector can achieve a constant 7 per cent terminal growth rate, or alternatively a 27 per cent [return on tangible equity], both of which are unlikely to be achieved," the analysts said.
Platypus Asset Management's chief investment officer, Don Williams, said CBA's highest p/e ratio was in 1999 at about 17 times earnings. "We would argue that 14 or 15 times is at the high end of its valuation range and the low end is around 10," he said
Last week, UBS analyst Jonathan Mott described CBA as the "most expensive large bank in the world by nearly every measure".
Using measures such as pre-provision profit, which looks at a bank's core earnings, and tangible book value, which calculates the net asset value of a company excluding intangible assets and goodwill, the big four Australian banks were at the top of the world's most expensive banks list, followed by the Canadian and Scandinavian banks.
Mr Williams said banks remained relatively attractive compared with other investments if investors were focusing only on yield.
"One of the reasons [banks] are trading expensive versus their own histories is because they still deliver a very high, safe, and for most of them, growing yield. As long as interest rates remain low and globally as well, the hunt for yield hasn't disappeared ... it's just having a correction."
But analysts said a falling dollar and expectations of an end to quantitative easing in the US led foreign investors to sell their shares in local banks last week.
"The proportion of that fall [in the banks] reflects not so much fear and loathing from a domestic investor perspective, but reflects offshore investors saying they are out of the bank holding they were in and out of Australian dollars," Patersons Securities strategist Tony Farnham said.