The Commonwealth Bank of Australia (ASX: CBA) share price and the Australia and New Zealand Banking Group (ASX: ANZ) share price could go lower before they go higher.
The same could be said for the National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC) share prices.
Big Bank Share Prices
I'm not one to look at a share price chart and make an investment decision — I think that's absolutely nuts! — but we can deduce a few things from the chart above, including:
- NAB sucks (more on this below)
- Bank share prices have rallied strongly in recent times; but
- Their share prices fall
NAB
NAB's share price has struggled to keep pace with its rivals over the long run because its former management thought of themselves as 'empire builders'. They expanded into the USA, Europe and pushed in a diverse set of products.
However, under the watch of CEO Andrew Thorburn, NAB has made a number of moves to right its ship and focus on its key strengths in local business banking and retail banking operations. This is a promising strategy, in my opinion.
Prices rallying
In recent times, the share prices of each of the banks have rallied strongly. In fact, the worst performer over the past year is Westpac, which has risen 'just' 13% before dividends.
However, one reason I am concerned about the recent rally is that profit growth has not supported the rise. There have been profit increases, but I think the recent rally has come more from stretched valuations than company fundamentals.
What's more, the profit growth has been aided by falling bad debts and low-interest rates.
Share prices fall
My issue with falling bad debts is that they are cyclical. Interest rate movements are a key yardstick of housing affordability, with Australia's record-low interest rates mirroring falls in the bank's bad debt charges and increasing house prices.
Bank profits — and, therefore, their share prices — rise and fall dramatically at times because they are leveraged to the market cycle more than most businesses.
You can see that in the chart above. During the global financial crisis (GFC), CBA shares fell from over $60 to $24 — a 60% fall.
Is it time to short sell bank shares?
Short selling is a strategy to make money when a share price falls. It is a high-risk way to invest money because you can lose unlimited amounts but can never make more than 100%.
In my opinion, the best way to make money by short selling is to identify companies which have a few common traits, including:
- A bad business
- Poor management
- Expensive share price
What's more, good short sellers want a catalyst (i.e. a big risk) in the near term. That is, an investor needs to be correct about a catalyst and the timing for a risk to present itself, sparking a selloff.
When it comes to Australia's big banks, I think they are great businesses and are well run — but they are expensive. Meaning, they tick only one of the three boxes above.
What's more, I cannot put a timing on a key risk event (e.g. falling house prices).
Therefore, I wouldn't risk short-selling bank shares today — but I am certainly not a buyer.
