According to a report on the Financial Standard website, portfolio manager Garry Laurence from Perpetual Limited (ASX: PPT) has described Australian banks as overpriced and undercapitalised.
Here's what Laurence had to say:
"We feel much more comfortable investing in more attractively valued financials globally…Australian banks are holding much lower capital levels than global banks."
Risks to the downside
While many shareholders are no doubt aware that based on historic metrics such as price-to-earnings (P/E) and price-to-book (P/B); Australian banks look fully priced. For example, Commonwealth Bank of Australia (ASX: CBA) is trading on a P/E of 15.1x, while Westpac Banking Corp (ASX: WBC) is trading on a P/B of 2.1x, according to data from Morningstar.
What many investors don't seem to understand or aren't concerning themselves with is the fact that like most industries, banking is cyclical – bad debts are at all-time lows and mortgage exposure to a bubbling housing market is at all-time highs – and it would appear that peak earnings have now been reached with the risk to the downside for earnings going forward.
A safer alternative
Many investors have been buying the banks first and foremost for their high, fully franked dividend yields and secondly for their perceived safety.
I'd suggest investors think very carefully about the perceived safety of banks – both from an operating point of view and from a current market valuation.
Rather than risking it in the banking sector, income-seeking investors could consider owning truly defensive businesses such as those in the listed infrastructure space.
One company to consider is Transurban Group (ASX: TCL). The group is forecast to increase its pay-out from the current 35 cents per share (cps) to 47 cps by 2017. What's more, earnings are expected to race higher from 17.8 cps currently, to 50.4 cps in 2017.
As the largest operator of toll roads in Australia, Transurban owns quasi-monopoly assets with sticky revenues and plenty of defensive characteristics. This stock appears a much safer bet for investors compared with the banks at present.
