Fund managers appear to be overly bullish about the prospects for Australia's big four banks.
Today the Australian Financial Review (AFR) published 11 reasons fund managers think the banks won't see their share prices crash. Unfortunately, it only takes one reason for bank shares to plummet, a side of the story the AFR has overlooked.
And it seems prominent fund managers are throwing tried and true valuation methods out the window.
Just 2 days ago Unisuper chief investment officer John Pearce told the AFR that he thinks Commonwealth Bank of Australia (ASX: CBA) shares are good value at current levels – around $90 per share. He also noted that bank financial ratios such as price to book value are irrelevant to local investors – who are much more concerned about the dividend yield.
Now local investors may not care about price to book value but they should. It's just one of a number of measures that shows Australia's big four banks including CBA, Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank (ASX: NAB) and Westpac Banking Corp (ASX: WBC) are overpriced.
Another indicator, the P/E ratio also suggests banks are overpriced, with CBA trading at a P/E of 16.6x, NAB and Westpac at 16.7x and Westpac at 15x. Historically, banks have traded around 12x. As many famous investors have noted time and again, shares tend to revert back to normal levels over time.
At a P/E ratio of 12 times, CBA shares would be worth around $63, NAB $23.76, ANZ $21.36 and Westpac $21.84. Across the board, if bank shares revert to their long-term averages, investors are looking at a 58% fall in the share prices.
Another aspect the AFR article failed to mention was unemployment. Should Australia's unemployment levels rise dramatically, banks may find a large number of their customers defaulting on their loans. According to Australian Bureau of Statistics (ABS) data released today, unemployment jumped to 6.4% in January this year and is steadily trending higher.
The third factor is that Australia's house prices have surged well beyond normal growth levels in the past couple of years. Australia's big four banks are heavily exposed to any downturn in the property market, with an estimated market share above 80%. I'm sure many readers will see that and say they can't see any major risks to our property market. I'd suggest they may want to read about Black Swans.
So there may well be 11 reasons the fund managers think the banks' share prices can continue going up – but it only needs 1 reason to sink them.
