The S&P/ASX 200 Financial Sector index is getting close to pre-GFC highs, which is producing "understandable nervousness" about valuations in the sector being pushed too high, said Mr Bassanese.
Earnings expectations in the S&P/ASX 200 Financial Sector index are holding up well, and valuations are still "way below the extremes just before the GFC", he said.
"Given persistent downgrades to corporate earnings expectations over the past year – due to falling commodity prices, the high Australian dollar and stubbornly cautious consumer spending – the resilience of financial sector earnings stands out like a beacon," Mr Bassanese said.
Valuations are also "far from threatening" at this stage, he said.
"While the price-to-forward earnings ratio is above its 10-year average, the price-to-book ratio is very close to average," Mr Bassanese said.
"On both measures, valuations are considerably lower than in the 2006-2007 period just prior to the GFC."
In addition, relative valuations (that is, earnings and dividend yields compared to bond yields) are close to their 10-year averages, or even "still slightly on the cheap side", Mr Bassanese said.
"While local banks have probably enjoyed the most of the boost to earnings from reduced GFC-related bad debt provisions, they are still enjoying a moderate upswing in credit growth, cheap offshore funding costs and a technology-driven capacity to cut costs further."
"While the financial sector may struggle to outperform over the coming year – assuming a rising interest rate environment – it still offers non-threatening valuations, and a relatively dependable earnings and dividend outlook for risk-conscious and yield-hungry investors," Mr Bassanese said.
