Should you buy, hold or sell the big four banks?
The Invast team has been writing about banking valuations since May 2014 and we think it's not too late to sell the banks at these levels.
Perhaps we were a little too early to call the top in the big banks earlier this year, but we stuck to our fundamentals and maintained our view that they were sells as they hit record highs.
That's now paying off for our clients given that those big bank shares are now trading at much lower levels.
Our grievance with Australian banks isn't their balance sheet quality, rather the elevated earnings multiple on which they trade.
Unfortunately, the conversation around Australian banks is dominated by two camps - the bulls who dismiss the high-earnings multiple and the bears who think the world will collapse and housing market losses will wipe out the banks.
There's room for a middle argument, one that recognises our banks as among the most attractive in the world but equally overvalued, based on a combination of factors. That's why we consider them a sell.
Take ANZ, for example, where profit is actually falling. Earnings rose for the full year to September 30, 2015, but fell in the second half.
Earnings are just part of the picture when analysing a bank. The balance sheet is the most important. Banks are in the business of pricing risk - they put their balance sheet on the line in order to make profit every single year.
So how does ANZ's balance sheet look? OK, for now. The book value per share is around $16. This is what shareholders would be left with if ANZ stopped trading today, paid off its liabilities and sold its assets.
We're comfortable paying around 1.5 times book value for a stock such as ANZ - this is a 50% premium to what the business is theoretically worth. So we are adding a premium. But that still only gets us to $24 per share or thereabouts.
Surprisingly, that's where the share price looks to be heading by the end of the year. A 1.5 times price-to-book multiple would imply CBA at $48, NAB at $30 and Westpac at $25.
That's a lot lower than where CBA, Westpac and ANZ share prices are now. Only NAB sits higher.
Dividend payments are a method of capital management - whether the cash sits with the bank and shareholders have entitlement to it via shares or the cash is paid out does not really matter.
The release of franking credits is probably the main consideration, but we at Invast would never base our argument around taxation. We think tax considerations should never be primary drivers. Dividend payments have no bearing on our view.