It's was a tumultuous ride for National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) shareholders in the first half of 2015.
Indeed, in the six months to June 30, neither bank's share price was able to break even, nor beat the broader S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
However, since then, NAB and Westpac shares are up 3.7% and 8%, respectively.
Are NAB and Westpac shares still cheap?
No one knows for certain which way NAB and Westpac shares will trend from here.
However, despite a decent rally, many investors may be inclined to say the banks are still cheap because they offer big dividend yields, have a strong track record of growing profits, and trade on a low P/E ratio.
Big dividends
Following the release of their half-year reports, both Westpac and NAB undertook capital raisings to increase their capital buffers against market shocks. However, both banks are still expected to pay out huge dividends to shareholders. Robbing Peter to pay Paul, anyone?
Personally, I doubt the banks will increase their dividend payouts as fast as they have in the past if APRA enforces higher capital requirements, which appears likely.
Track Record
It's true Australia's big banks have grown profits well over the past decade. However, we must also acknowledge that household debts have ballooned to record highs, the mining boom juiced wage price growth, a housing boom has made everyone feel rich, and we've not had a recession in over 23 years!
Even the bank's CEOs themselves acknowledged the outlook for credit growth remains uncertain, but competition is growing. Without increasing demand for credit (and respectable profit margins), future profits are in doubt.
Low P/E Ratios
Shares of both NAB and Westpac currently trade at a price-earnings ratio at, or around 13x. Yes, that's lower than the market's average of 16x, but that doesn't necessarily mean their shares are cheap.
The P/E ratio is an inadequate measure of value at the best of times, but costly at the worst of times. For a bank stock, a P/E ratio is especially dangerous because their profits are cyclical. Moreover, a P/E ratio won't say anything about a bank's lending practices, leverage, exposure to dodgy credit markets, funding structure, profit margins or bad debts.
So, are they a buy?
Given their uncertain growth outlook and arguably expensive share prices, I think Westpac and NAB shares are a clear sell. Of course, that's just my opinion, and I could well be wrong.
However, I must say, I think the writing is on the wall.
A far better dividend stock idea than the banks
