Is it time to cash in some profit on ASX 200 bank shares?

The S&P/ASX 200 Banks Index surged almost 30% compared to a 7.5% lift for the broader ASX 200 last year.

A man in a business suit whose face isn't shown hands over two australian hundred dollar notes from a pile of notes in his other hand to an outstretched hand of another person.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

ASX 200 bank shares had a phenomenal run in 2024, with the S&P/ASX 200 Banks Index (ASX: XBK) soaring 29.75% compared to a 7.49% lift for the benchmark S&P/ASX 200 Index (ASX: XJO).

The following chart shows what happened with the major ASX 200 bank shares last year.

Created with Highcharts 11.4.3Commonwealth Bank Of Australia + Anz Group + Westpac Banking Corporation + National Australia Bank + Bendigo And Adelaide Bank + Bank ofQueensland + Judo Capital PriceZoom1M3M6MYTD1Y5Y10YALL1 Jan 202431 Dec 2024Zoom ▾Jan '24Mar '24May '24Jul '24Sep '24Nov '240www.fool.com.au

With share prices elevated, would it be prudent to reduce your holdings or cash out altogether?

Should you consider taking profits on ASX 200 bank shares?

Let's canvas some expert views to help you decide whether to take profits on ASX 200 bank shares.

According to The Australian, top broker Morgan Stanley thinks ASX bank share prices have overshot.

Based on consensus estimates, the Big Four banks have a 12-month forward price-to-earnings (P/E) ratio of 18.3. This is well above the decade average of 13.7 and the post-pandemic average of 14.4.

They have a 12-month forward dividend yield of 4.7%.

Morgan Stanley analyst Richard Wiles said:

We believe current share prices are not justified based on the banks' growth and return profile.

Wiles said today's high P/Es reflected the banks' strong balance sheets, low earnings risk, and safe haven appeal.

JPMorgan strategist Kerry Craig said the issue with last year's big winners, such as ASX 200 bank shares and tech stocks, was valuations.

In the Australian Financial Review, Craig said these companies' share prices could fall if they didn't grow their earnings enough to justify their re-rated valuations.

Casey McLean from Fidelity International said bank shares were "at risk given the low growth outlook and high valuation".

Matthew Haupt from Wilson Asset Management also has concerns about the valuations of bank shares.

Haupt puts it this way:

Commonwealth Bank of Australia (ASX: CBA) is now trading at 3.5x price-to-book (P/B) ratio value, while writing loans at cost of capital, worth 1x book value.

CBA's dividend yield of 3% now pales in comparison to the 4.5% return you could earn in a CommBank term deposit.

While they are great businesses, this does not represent value to us.

Haupt said his team preferred undervalued companies with strong assets, such as Spark New Zealand Ltd (ASX: SPK), Telstra Group Ltd (ASX: TLS), Dexus (ASX: DXS), and Challenger Ltd (ASX: CGF).

Mathan Somasundaram, CEO of Deep Data Analytics, said they would sell bank shares because "they are trading at unsustainable levels due to global funds".

Somasundaram advocates reducing exposure to shares and bulking up on cash and bonds for now.

What about dividends?

Hamish Tadgell from SG Hiscock and Co. said some investors were hanging onto their ASX 200 bank shares for the dividends.

However, he said investors "should expect lower future returns, given current valuation and earnings growth expectations".

There's still a chance the banks could stay at their current high share prices if economic conditions remained the same and home loan arrears and other bad debts did not significantly increase, he added.

JPMorgan Chase is an advertising partner of Motley Fool Money. Motley Fool contributor Bronwyn Allen has positions in Macquarie Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended JPMorgan Chase and Macquarie Group. The Motley Fool Australia has positions in and has recommended Bendigo And Adelaide Bank, Macquarie Group, and Telstra Group. The Motley Fool Australia has recommended Challenger. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Bank Shares

A man smashes open a piggy bank with a hammer representing an ASIC fine received by Westpac
Bank Shares

$10,000 invested in Westpac shares 10 years ago is now worth…

Here’s how much the major Aussie bank is worth.

Read more »

A man thinks very carefully about his money and investments.
Bank Shares

Is the CBA share price a buy in the lead-up to its FY25 result?

Should investors invest in CBA before its report?

Read more »

a woman holds her hands to her temples as she sits in front of a computer screen with a concerned look on her face.
Bank Shares

Why did the CBA share price tumble 4% in July?

Australia's largest bank had a tough time last month. But why? Let's find out.

Read more »

Overjoyed man celebrating success with yes gesture after getting some good news on mobile.
Bank Shares

Is the NAB share price a buy after the surprise positive news?

Are NAB shares attractive after a recent update?

Read more »

A businessman sits on an armchair adrift at sea.
Bank Shares

How the tide turned negative for ASX 200 bank stocks in July

Here’s why the tide looks to be turning for the big Aussie banks.

Read more »

Five different piggy banks, indicating a diverse share portfolio.
Bank Shares

Investing in ASX 200 banks: Which macroeconomic variables matter according to Macquarie

The majority of absolute bank performance can be explained by four key factors.

Read more »

A man in a suit smiles at the yellow piggy bank he holds in his hand.
Bank Shares

What's Macquarie's view on NAB shares?

Is the broker feeling bullish, bearish, or something in between? Let's find out.

Read more »

Hand with AI in capital letters and AI-related digital icons.
Bank Shares

CBA shares lead the big 4 banks in using AI to cut costs

AI initiatives could transform the banking sector.

Read more »