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The banking sector has been a great place to invest over the last six months.
During this time, a number of Australian banks have significantly outperformed, delivering big returns for investors.
For example, Commonwealth Bank of Australia (ASX: CBA) shares are up 16% and Westpac Banking Corp (ASX: WBC) shares are up 25%.
Regional bank Bank of Queensland Ltd (ASX: BOQ) has also been on form, rising by 9% over the six months.
However, the team at Goldman Sachs has just reiterated its view that investors should be locking in their gains and moving out of the banking sector.
What is Goldman saying at the banks?
It notes that bank valuations in Australia have always been higher than their global peers. And this has been somewhat justifiable given their higher returns on equity (ROE). But the latter no longer is the case. It explains:
In CY15A, the Australian banks earned the second highest average ROTE/ROE of global comparable banks, slightly below that of the Canadian banks. However, between 2015 and 2023, Australian bank ROTE/ROE underperformed global comparable banks by c. 50%, such that Australian banks now actually earn the lowest ROTE of global comparable banks, and among the lowest ROE.
Unfortunately, Goldman doesn’t believe this trend will change any time soon. It adds:
Interestingly, the underperformance on returns can largely be attributed to NIM and the exit from sources of low capital intensive non-interest income, neither of which we expect to improve over the forecast period. Furthermore, we note that balance sheet gearing has actually been a relative returns tailwind for Australian bank returns.
ASX banks look expensive
Despite the above, Australian investors have been prepared to buy CBA and other ASX bank shares even though they are the most expensive in the world. It adds:
Despite this relatively poor ROTE/ROE performance, the fall in Australian bank price-to-book multiples has largely matched that of their global comparable peers, such that they collectively remain the most expensive global banks (1.9x P/BV for 11% ROE vs. global comparable banks 1.3x P/BV for 13% ROE). With all this in mind, we estimate the Australian banks, relative to global comparable peers, on a ROE vs. price-to-book multiples basis, are currently trading at the 96th percentile versus history (95th percentile ex-CBA).
Sell Westpac, Bank of Queensland, and CBA shares
In light of the above, it will come as no surprise to learn that Goldman has put sell ratings on CBA, Bank of Queensland, and Westpac.
It has a sell rating and $82.61 price target on CBA’s shares, a sell rating and $24.10 price target on Westpac’s shares, and a sell rating and $5.44 price target on Bank of Queensland’s shares.