Shares of banks like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) have galloped higher over the past 25 years of recession-less Australia.
The same could be said of National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).
Privatise profit, socialise losses
One of the reasons our banks have made great investments is capitalism. Basically, during the good times — which is most of the time, for our banks — our financial institutions will make huge profits and pay big dividends to their well-to-do shareholders.
At other times (like during the global financial crisis), the banks will cry wolf (read: lobby) and expect the government to come save them. And the government will. After all, if they let the likes of Commbank fail – our entire country would collapse.
For example, during the GFC, the government put a deposit guarantee in place for the major banks. With the guarantee still in place some nine years later the major banks have been able to get more deposits and lend more money – fuelling more profits.
Are they a buy?
Simply being implicitly guaranteed by the government does not mean you will make a good investment by buying bank shares.
As always it's important to determine the value of your investment because if you overpay for a company's shares you increase your chances of losing money.
Banks can be difficult to value. But a simple way to judge any investment is to take a look at the risks and determine if you are willing to accept them.
Right now, the big banks are making big profits.
However, house prices could be entering a period of weakness at a time when the banks face increased regulatory burden and competition. All the while, their funding costs are increasing and the cyclical effects of interest rates and bad debts have helped them grow.
Looking ahead, I doubt the benefits of these external forces can continue as they have.
It's okay to have risks, of course — every investment has risks. But you must pay a price for the shares that is reasonable.
In my opinion, big bank shares are not yet cheap enough to justify their risk-adjusted outlook.
