Since reporting their half-year results, shares of Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB), have plunged.
Over the past month, their share prices are down 9.6%, 4.5%, and 9.3%, respectively.
No doubt now some investors are licking their lips at the opportunity to buy more bank shares. And why wouldn't they?
After all, interest rates are at record lows and big bank stocks are offering fantastic dividend yields.
| NAB | ANZ | Westpac | |
| Share Price | 33.96 | 33.205 | 33.77 |
| Net Interest Margin | 1.92% | 2.04% | 2.06% |
| Return on Equity | 14.70% | 14.00% | 15.10% |
| Cost to income | 44.50% | 44.90% | 42.50% |
| APRA CET1 Capital Ratio | 8.87% | 8.70% | 8.76% |
| Dividend Yield | 5.83% | 5.45% | 5.48% |
| Price-Earnings Ratio | 16.17 | 12.67 | 13.71 |
| Price to tangible book value | 2.170 | 2.108 | 2.852 |
Source: Half-Year Reports & Morningstar
As can be seen from the table above, fully franked dividend yields of around 5.5% are on offer from each of the three banks.
Taking a closer look
However, looking back over recent years, it's easy to see that profit margins at each of the big banks have begun to come under pressure. Net interest margins, return on equity, and return on assets have fallen over the past three years.
This is a result of increased competition among the big banks, regional lenders, and mortgage brokers and also lower interest rates.
The problem for bank shareholders is that sooner or later the margin erosion will begin to hinder their record profits. Moreover, as can be seen from their price to tangible book values in the table above, none of the banks are cheap at today's prices.
At over 2.1x net assets, investors must be anticipating strong credit growth to justify buying shares at these levels. Unfortunately, I don't think that's going to happen.
Buy, Hold, or Sell?
Given their prices and the outlook for growth, I think these three bank stocks are, at best, a hold. Therefore, investors should look around the market for other dividend stock ideas to buy now.
