The ‘big four banks’ reside in this sector – along with some regional banks, insurance companies and diversified financials like Macquarie – making 14 stocks in total this ASX 100 sector (listed in the table below).

The recommendations for most of these stocks are not great. Five of them are not even better than ‘3’ for a hold! Two of the big four – CBA and WBC – do not meet my criterion of a 2.5 or better, but the other two do just make it (please see my paper on the Market Updates tab of our website www.woodhall.com.au for details). Having worked in the industry for decades, I am well versed in the Sydney (CBA, WBC) versus Melbourne (ANZ, NAB) divide and I (naturally?) fall into the Sydney camp. My undocumented view is that ANZ and NAB seem to have had more problems in the past with overseas strategies and risk issues than the other two big banks.

I hold CBA and WBC and I have done very nicely with them – even though it has been a while since they had good ratings. Dividends in this sector are reasonably big and consistent over time. For me, a fully franked dividend and moderate capital gains with no big issues, pulls me towards CBA and WBC. Of course, a stock can have an underperform rating because their prices have run very hard – and not because the company is ‘not good’. Anyone who read CBA’s stellar accounts last week would have regretted not being in it during its 32% capital gain in the last year to a new all-time high. WBC is close to its all-time high but the other two banks are not near such peaks – and NAB’s price would have to increase by nearly 50% to beat its previous peak!

I have held other stocks in this sector in the past but I am not tempted to revisit. I can get my excitement elsewhere! Of course anyone who invests in insurance companies must live with the distinct possibility of a major disaster striking not just the people, but also the insurers’ balance sheets, with little warning.

Sector outlook

Turning to Chart 1, I plot the recommendations for all of the big four. CBA has been consistently worst by this measure and WBC has not been much better. NAB’s rating has improved much in recent times – perhaps on the back of yet another new strategy.

The exuberance trace for this sector shown in Chart 2 tells an important story. It has bounced beautifully off the 6% dotted line that is our indicator of a correction or prolonged sideways movement. It did stay at elevated levels during the latter part of 2009 – as did most sectors – as investors piled in hoping the GFC was over. In recent weeks, the 6% line has been broken – and with much momentum. The question to be asked now is whether this is a re-run of late 2009 or an accident waiting to happen?

The critical issue is whether analysts start to upgrade earnings forecasts in the wake of last week’s CBA report. If they do, some of this overpricing will be eroded leaving the four banks as good dividend plays and two of them as very good plays!

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.