Another banking bubble on its way?

As interest rates drop, bank stocks become riskier for many reasons, here are some alternatives.

Owen Raszkiewicz

Owen Raszkiewicz is a Motley Fool Contributor. Owen has been a Contributor since 2013, having also spent time as a Fool writer/analyst. He also worked as an Investment Analyst at Zenith Investment Partners, Australia's top research house specialising in managed funds. Owen has appeared on Channel 10's The Project and was invited on the BBC. He holds a Masters of Applied Finance, Masters of Financial Planning, Bachelor of Technology, Advanced Diploma of Financial Services and Diploma of Mortgage Broking Management. In addition, Owen has passed Level 1 of the Chartered Financial Analyst (CFA) Program. He has taken the Banking + Finance Oath (BFO). When he is not writing, Owen is Managing Director of Rask Finance, an Australian financial education company. You can email him: [email protected].

Published July 31, 2013 12:15 pm AEST

RBA governor Glenn Stevens has signalled there is more room for interest rate cuts as the economy slows but some investors may be fooled into thinking that the benefactor of lower rates are bank stocks. It's not as it seems.

Bank stocks are renowned for high dividend yields and safety and especially when the interest rate is expected to drop further, everyday investors think the switch from a 3.5% interest bearing account to a 5% fully franked yield is easy money. It's not.

At current prices, not one of the big four banks are 'cheap' by any valuation. Commonwealth Bank (ASX: CBA) will be expected to pay a dividend slightly below 5% fully franked but that's if you hold onto them for an entire year. In the meantime, its price could drop further than 5%, just like it did from mid-May to June.

Source: Google Finance

NAB (ASX: NAB) has the highest fully franked dividend yield (5.9%) followed by Westpac (ASX: WBC) (5.6%). At current prices ANZ (ASX: ANZ) offers a dividend of 4.9% but can afford to do so given its long-term growth prospects, however it is not immune to investors' expectations and yield chasing.

Better alternatives

Not only do the banks offer higher share prices, the next few years are unlikely to hold the same amount of growth as in the past 10 years. The contraction in mining investment, tighter lending conditions and fewer depositors put our banks at risk. A slowdown in our economy hurts our banks. Currently, Myer (ASX: MYR) and Metcash (ASX: MTS) offer some of the best dividend yields on the market and are well priced.

Foolish takeaway

Traders could find value in current bank stock prices but this Fool believes short sellers will find more. Investors transitioning from term deposits and bank accounts to stocks should consider that interest rates may stay low for a long time, in such a case it would be wise to find stocks cheap that can be held for a longer term.

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Motley Fool contributor Owen Raszkiewicz owns shares in Myer and Metcash.

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