Australian bank stocks, including Westpac Banking (ASX:WBC) Corp (ASX: WBC), ANZ Group Holdings Ltd (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), and National Australia Bank Ltd (ASX: NAB), have shown impressive returns over the past year. Westpac, for instance, has surged over 30%, reflecting strong investor interest in the sector. However, amid these gains, concerns are emerging about whether these ASX financial stocks are now overvalued. Some analysts suggest that it might be prudent for investors to consider reducing their exposure to the banking sector.
Analysts note that Australian bank stocks appear expensive when compared to their global peers. Despite the resilience of the Australian economy and the robust performance of the housing market, metrics like Return on Equity (ROE) and Price/Book (P/B) ratios suggest that current valuations may be stretched.
For example, Commonwealth Bank, which generates an ROE of approximately 13%, trades at a P/B ratio of 2.7x. In contrast, US banking giant JP Morgan, with a similar ROE of around 15%, trades at a P/B ratio of 1.7x. This disparity raises questions about the significant premium Australian banks command relative to their international counterparts.
Moreover, Australian bank stocks are not only expensive compared to global peers but also relative to their own historical multiples. Metrics like Price/Earnings (P/E) ratio and P/B ratios are above their long-term averages, suggesting that current prices may not fully reflect underlying value.
Analysts caution that these valuations imply strong future earnings growth. However, market expectations for FY 2025 indicate a potential decline in earnings, contrary to the optimism baked into current stock prices.
In light of these factors, analysts recommend a cautious approach, advocating for underweighting exposure to Australian banks in investment portfolios. They anticipate that a correction may be looming unless there is a significant improvement in the earnings outlook or a revaluation of stock prices to align more closely with earnings prospects.
For investors holding Australian bank stocks, now could be a pivotal moment to reassess their positions. While recent performance has been strong, the current valuation metrics and earnings outlook suggest potential risks ahead. Investors should weigh these factors carefully and consider adjusting their portfolios accordingly to manage risk and optimize returns in the evolving market landscape.