S&P/ASX 200 Index (ASX: XJO) bank shares were among the best performers in 2024.
As shown in the chart above, the major banks have delivered a strong return in the last 12 months. Shares in Commonwealth Bank of Australia (ASX: CBA) are up 36%, while the Westpac Banking Corp (ASX: WBC) share price has climbed 39%. The ANZ Group Holdings Ltd (ASX: ANZ) share price has also lifted, up 13.4%, and the National Australia Bank Ltd (ASX: NAB) share price has surged almost 23%.
Which is all well and good.
But, as fund manager Auscap Asset Management pointed out, the banks delivered a net profit after tax (NPAT) decline of 5.1% in FY24 and are expected to deliver just 2.8% net profit growth in FY25.
In its monthly update for the Auscap High Conviction Australian Equities Fund, the fund manager said the banks had seen "virtually no earnings growth over the last decade".
Auscap pointed out that if investors owned shares in the big four banks — CBA, ANZ, NAB and Westpac — in proportion to their current market capitalisations, the multiple of earnings they would now pay is the "highest on record".
The fund manager said:
This is the highest collective multiple the banks have traded on in at least the last few decades.
Despite the lack of earnings growth, the banks were responsible for approximately 53% of the performance of the All Ordinaries Index.
For managers of publicly listed capital, not owning the largest companies will often increase the volatility of performance. In 2024 it also made generating outperformance a very difficult exercise.
After the strong rise in bank share prices, the high valuations and the prospect of weak earnings growth, Auscap doubted whether many active fund managers would own as many ASX 200 bank shares if the banks didn't have such big weightings in the index.
Auscap said:
Yet we doubt many would justify holding such large weights in companies, which excluding CSL Ltd (ASX: CSL) are expected to deliver anaemic or potentially even negative earnings growth over coming years, at these weights absent the index composition, especially since the banks in particular are trading on extended multiples.
Auscap noted that, according to Factset's collation of analyst estimates, the banks are trading on the following forward price/earnings (P/E) ratio for FY25:
Time will tell whether Auscap is right to be pessimistic about ASX 200 bank shares at the current valuations.
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