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How excited should we get about big 4 bank valuations?

How excited should we get about big 4 bank valuations?

The big four banks have attracted a fair bit of media comment recently. On one hand we are told that some international investors can’t understand the lofty valuations attached to Australian banks and are shorting them in volume. On the other hand we are informed that these international investors do not properly understand the Australian context, and will surely get burned on their shorts.

We don’t especially want to weigh in on either side of this debate, because neither side looks very convincing to us. From our point of view, the big four banks do look a little overvalued – but good companies often do. They can stay there for extended periods, and so it’s not something that would necessarily justify going short.

One issue with our point of view is that it doesn’t make for a very interesting headline: “Banks a little above fair value; nothing to get excited about!”

If you can look past the short term noise in the media, there are quite a few interesting points that can be drawn from analysing changes in intrinsic value and price. One of the more important points is the difference between the value growth that can be delivered over time by a good company, compared with a weaker company. In the case of the Australian banks, CBA has been the clear standout in terms of growing value for shareholders, and NAB has been the clear laggard.

A relevant question for any investor should be whether this is likely to be any different in the future. In fact, if you are minded to invest for the long term, this is perhaps the most important question for you to consider. If you can get this one right, you can expect to do quite well over the next decade.

More importantly, you won’t need to worry too much about what news story is capturing media attention in any particular week.

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Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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