Last week, as the Brexit votes were tallied, investors went into a selling frenzy.
Shares in the financials sector were most affected.
Brexit update: Are bank shares a BARGAIN?
While many of Britain's major banks notched up single-day share price falls exceeding 17%, Australia's major banks could not avoid the selloff:
- Commonwealth Bank of Australia (ASX: CBA) – down 3.4%
- Westpac Banking Corp (ASX: WBC) – down 5%
- National Australia Bank Ltd. (ASX: NAB) – down 4%
- Australia and New zealand Banking Group (ASX: ANZ) – down 4.3%
- Macquarie Group Ltd (ASX: MQG) – down 7.5%
The key question on every investor's mind now is: Is it time to buy bank shares?
Market-thumping dividends
Amidst the Brexit selloff, the dividends from shares in Australia's major banks have become even more enviable. For example, using last year's payout, NAB shares yield a dividend equivalent to 8% fully franked. CommBank shares are forecast to pay 5.8% fully franked.
In a market of low-interest rates, bank shares may produce a respectable return for shareholders by simply paying the same dividend as last year.
However, as with any investment, there are risks.
Firstly, Brexit may continue to send shockwaves throughout the financial sector and slow the global economy. Undoubtedly, this volatility could be hard to stomach.
Secondly, regulatory risks are compounding the recent downtrend in bank shares (each of Australia's big banks are down more than 13% in the past year). For example, APRA, the banking regulator, is likely to raise the banks' mandatory capital levels. Higher capital levels present challenges for bank profit growth and could dampen the prospects for dividend increases over the next few years.
Another concern, especially for long-term investors, is competition in the housing market. Over the long term, house prices cannot continue to increase at the same pace that they have in recent years. Coupled with a leveled playing field for regional banks, slower house price growth will place more downward pressure on big bank profit margins.
Valuation
Shares in Australia's big banks appear cheap using relative metrics like price-earnings ratios and — to a lesser extent — price-book ratios. However, none of the big four banks could be called 'bargains' at today's prices, in my opinion.
Foolish takeaway
Not only does Britain's Eurozone exit create uncertainty in financial markets, it has set a precedent for other countries to do the same. Therefore, personally, I doubt we've seen the last of the meaningful single-day selloffs.
Though there are risks facing an investment in Australia's major bank shares at today's prices, further price falls could create a compelling buying opportunity for shrewd investors. For dividends, I think NAB and CommBank shares could be worthy additions to well-diversified portfolios — at the right price!
