Are NAB (ASX:NAB) And CBA (ASX:CBA) Shares Dramatically Overvalued?

You might think that investing in the largest businesses, such as the big banks, wouldn’t produce much volatility.

Yet over the past five years the Commonwealth Bank of Australia (ASX: CBA) share price started at nearly $77, rose to nearly $96, dropped to just under $66 and is now at $70.70. The National Australia Bank Ltd (ASX: NAB) share price has been similarly volatile over the past five years.

Are CBA and NAB shares good value these days?

It’s important to remember that share prices are forward looking. It’s the market’s collective way of saying what the earnings and prospects of the business are over the short-to-medium term.

Both the NAB and CBA share price are down compared to a year ago. That’s not surprising considering the Royal Commission has hammered the reputation of all the big banks including Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) as well as AMP Limited (ASX: AMP).

Not only has it hurt the reputations but it has burnt holes in earnings growth as well with all of the customer remediation costs.

Another big cause for the negativity surrounding the banks is that they are heavily linked to Australia’s housing market. Compared to most international banks, a much larger percentage of earnings comes from residential property loans with the ASX banks.

This is a problem with Australian house prices dropping in value quite significantly month after month. According to CoreLogic, the two biggest housing markets of Sydney and Melbourne have seen their dwelling prices fall 10.4% and 9.1% drop respectively over the last year. But with the monthly falls remaining above 1% a halt of declines seems unlikely in the near future.

If customers get behind on their repayments, particularly with the amount of interest only loans converting to principal and interest repayments over the next few years, we could see bank bad debts rising, earnings fall and dividends cut.

In the above scenario, banks could be called overvalued at today’s prices. But there’s no guarantee that a worst-case scenario will happen. The national and global economy isn’t always great, but it doesn’t often turn bad either.

I am not attracted to CBA and NAB shares at the current share prices, despite their attractive dividend yields. The risks and rewards are finely balanced, which makes it an unattractive option. I believe there is better growth and more reliable dividends on offer from the shares mentioned in the free report below.

At the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.

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