Recently, Australia's big banks have soared ahead of their international counterparts because of their safety and return through conservative loans and a strong domestic economy.
The ANZ (ASX: ANZ), National Australia Bank (ASX: NAB) and Westpac (ASX: WBC) have each seen their share price rise in dramatic fashion over the past 12 months. Respectively, they are up 50%, 57% and 65.2%. That's huge by any measure, but even they can't top the list of the most expensive banks in the world.
According to analysts at UBS (NYSE: UBS), the top spot belongs to the Commonwealth Bank of Australia (ASX: CBA). Compared to global partners like Citigroup (NYSE: C) and HSBC (NYSE: HBC), CBA is more expensive in terms of price-earnings ratio or book value.
Last week, the CBA reported a quarterly profit of $1.9 billion, which took the total profits from the big four to over $13 billion. CBA's shares reached a high of $74.18 on Monday, meaning the stock traded at 10.2 times its profits before accounting for bad debts. According to UBS analyst Jonathan Mott, CBA's tangible book value of 3.6 times is the highest in the world and went on to say that it is the most expensive "bank in the world by almost every measure". He says the bank is a sell and priced it no higher than $60 per share.
Although the big four announced record profits up 7.2% from the previous year, the mean rise in share price across them is almost 57%. The profits came largely from cost-cutting, and the inflated share prices from international and local investment. The bubble could pop when international investors begin withdrawing their money from the safety of the Australian economy as interest rates lower.
Currently the big four are stressed to maintain profit growth as the resources boom fades and the housing sector struggles to pick up the slack. As a result we will see revenue and profit slow in the next year, particularly as demand for credit drops further. Credit Suisse analyst James Ellis says, "The optimization of bank earnings is reaching its limit, with bad debt charges as feasibly low as they can get, margin expansion and the pace of productivity improvements fading".
Foolish takeaway
Unless you're in it for the long run, the next few years in banking stocks may be tough. Particularly as they reassess the next step to seek profit. Notably, the ANZ has begun its expansion into Asia which could provide it with some relief, but it doesn't take an analyst to know that a 7.2% rise in profit growth doesn't equal 50% share gains.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Owen Raszkiewicz owns shares in ANZ.
