Speaking at a luncheon in Sydney yesterday, Perpetual head of investment research Matt Sherwood said banks are not the risk-free source of earnings a lot of investors think they are.
“There are some valuation issues in Australian shares and one of them has been the massive run up we have seen in our banks during the search for yield,” Mr Sherwood said.
“When we cast our minds back 15 years ago, Australian banks traded at a 30 per cent discount to their global peers,” he said.
“Today, they trade at a 30 per cent premium. It will therefore cost you 30 per cent more to buy a dollar of earnings from an Australian bank than it does in other parts of the world.”
While bank valuations are very high, they do have lower earnings risk than their global peers, Mr Sherwood added.
However, the risks are still there, he said.
“We are at the bottom of the bad and doubtful debt cycle, credit growth is still very very subdued and margins are getting pressured,” Mr Sherwood said.
“The price to book value is also very high.
“Commonwealth Bank is still the ninth most expensive bank in the world on a price to book basis out of 500 banks in the MSCI Index.”
