ASX 200 bank shares are experiencing a remarkable surge in 2024. The S&P/ASX 200 Banks Index (ASX: XBK) has surged 19% this year to date.
Meanwhile, the benchmark S&P/ASX 200 Index (ASX: XJO) is up nearly 5% in the same time span.
Banking stocks have consequently offered a nearly 14 percentage point advantage over the benchmark, driven by names such as Commonwealth Bank of Australia (ASX: CBA). The stock is up 15% year to date, currently trading at $131.16 apiece.
The other banking majors have performed well too. Here are there year to date returns, along with share prices at the time of publication:
- National Australia Bank Ltd (ASX: NAB) has risen 20% to trade at $37.15
- Westpac Banking Corp (ASX: WBC) has risen 21% to trade at $28.04
- ANZ Group Holdings Ltd (ASX: ANZ) has risen 13% to trade at $29.41
With the sector trading at high valuations, it's worth discussing what's behind the momentum and what this means moving forward. Here's a look at what the experts are saying.
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Auscap's insights on ASX 200 bank shares
ASX 200 bank shares have outperformed in 2024 as investors began to pay higher valuation multiples on the earnings of these companies.
In its July Investment Newsletter, Auscap Asset Management provided a detailed analysis of the current state of ASX 200 bank shares.
The asset manager argues active management in Australia is more compelling than passive investment due to the unique composition of the ASX 200.
It points out that the largest weights in the ASX 200 are dominated by banks, with the four majors accounting for 22% of the index.
All four banks have recently experienced strong share price appreciation, but this largely appears to be a function of the market paying a higher multiple of earnings for these companies than representative of a lift in their earnings growth.
In fact, analyst forecasts suggest the market expects anaemic earnings growth for the big four banks over the next 5 years.
This suggests that the current surge is driven more by market sentiment than by significant improvements in the corporate earnings of ASX 200 bank stocks.
But despite the recent share price increases, Auscap highlights that these banks have failed to grow earnings meaningfully over the last decade.
It cites several factors contributing to this stagnation: a more risk-averse approach to lending, increasing competition from private credit providers, and rising costs associated with cyber security, IT, and compliance.
The firm added:
With the large banks continuing to display a more risk-averse approach to lending, facing increasing competition in residential mortgages and business lending with the emergence of private credit providers, and having to deal with rising cyber security, information technology, compliance, and employee costs, we struggle to see tailwinds for material earnings growth in the future.
Analysts views
Despite the sector's recent performance, some analysts, like those at Macquarie, remain cautious about these banks' future growth.
The firm warns that the current valuations might be too high and may not support sustained earnings growth.
It notes that banks are currently experiencing one of the lowest bad debt periods on record, which may not support an earnings recovery in the medium term.
Consequently, it doesn't "see a clear path for underlying profitability to improve meaningfully" for the sector.
UBS provides a slightly different take. According to my colleague Bronwyn, it acknowledged that, while ASX 200 bank shares appear expensive, it does not see a fundamental reason for a significant derating soon.
Moreover, compared to "countries like Sweden, Spain, and Canada", ASX bank stocks appear well priced.
Apparently, UBS' clients are asking what ASX 200 banks "should…be doing from here."
No doubt many investors are asking the same thing.
Foolish takeaway
ASX 200 bank shares have delivered impressive returns in the past year, but analysts warn that their current valuations may be too high.
The insights from Auscap also highlight the importance of understanding market sentiment versus actual financial performance.
As always, conducting thorough research and considering long-term goals is crucial before making any investment decisions.
