According to an article in the Fairfax Press today, a report by the Bank for International Settlements (BIS) found Australia's banks are again the most profitable in the developed world.
Achieving an average profit on assets before taxes of 1.28%, the report found Australia's banks ranked ahead of those in the U.S and Canada, at 1.11% and 1.06%, respectively.
However, banks in the emerging markets of Brazil and China achieved the highest returns at 1.66% and 1.83%, respectively.
This is the fifth consecutive year BIS has ruled Australia's banks the most profitable among developed nations and comes as key property markets around Australia and New Zealand continue to notch up strong growth.
During 2014, the major Australian banks continued to post record profit growth as bad debts fell in the wake of lower official interest rates.
However, the RBA's dropping of its easing bias, cyclical lows in bad debts, increased regulatory oversight by APRA and subdued economic growth, recently prompted some analysts to adjust their fair value estimates on big bank stocks.
Over the past three months, each of the major banks – including Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) – have fallen more than 10% in price.
Even big bank bosses themselves have forecast slower credit growth and increased competition over coming years, adding further pressure to their eye-watering valuations.
Further, as the country transitions from the mining boom, if unemployment rises it is possible the banks' record profits – and their return on assets – will fall materially.
As I showed here, a lower return on assets can result in a meaningful reduction to an analyst's fair value estimate on bank shares. As a result of the headwinds they face and their current valuations, none of the big banks appear good value for long-term investors today.
Forget the big banks — Get our #1 dividend stock idea – FREE!
