Market likely to test new five-year highs

Stocks in three of the big four banks have hit record highs ahead of their earnings season, boosting the local sharemarket as it looks set to start the week above its five-year peak.

ANZ, which is due to report its earnings on Tuesday, saw its market capitalisation rise to a record high of $89.6 billion on Friday. Commonwealth Bank shares rose to $76.28 as its market cap hit $122.9 billion.

Westpac shares were also at record levels, closing last week at $34.36 for a market capitalisation of $106.8 billion. And NAB, which will report its earnings on Friday, rose to an almost six-year high of $36.08.

The stellar performances by the banks helped the market close at a new five-year high on Friday, its third straight week of gains.

The benchmark S&P/ASX 200 is already up 14.46 per cent this year, closing in on last year's gain of 14.6 per cent.

Local stocks were poised to begin the week in positive territory, with the SPI futures index up 33 points to 5418.

"The income investors have been very happy," Patersons Securities strategist Tony Farnham said on banking stocks.

Analysts said investors were drawn to the big banks' earnings growth, which were seen as reliable. The steady growth in earnings has also led to a rise in dividends, while those with excess capital have passed some of that back to shareholders through increased payout ratios.

Both ANZ and NAB are forecast to report a 10 per cent rise in earnings this week.

The steady rise in the share prices has continued a debate over whether banking stocks are overvalued or about to reach their peak.

Mr Farnham said while banks appeared overvalued compared with most of their international peers, the financial institutions were well positioned to take advantage of Australia's economic situation.

The major lenders are expected to benefit from the upturn in the housing market, with a key revenue stream — mortgages — likely to continue expanding.

At the same time, while the yield spread between cash, term deposits and banking stocks has narrowed as banking stocks soar to new levels, shares in the lenders still remain relatively attractive.

"You've got record low interest rates from the Reserve Bank, you've got a limited space of assets at the moment that are fair value or close to fair value, and [the banks are] paying above-average yield," Arab Bank treasury dealer David Scutt said.

Meanwhile, with the Australian economy continuing to perform more strongly than those of other developed economies, international investors remain drawn to the local sharemarket.

"They have been coming in, buying their Australian dollars and popping it into liquid investments like banking stocks," Mr Farnham said.

"But it's not just the banking stocks. I'm sure the major retailers and the likes of Telstra get some benefits from that game as well."

Even so, Mr Scutt said he did not expect banking stocks to rise much further unless the banks posted a sharp lift in earnings.