‘Dizzying’ is an appropriate adjective to describe the share price of Commonwealth Bank of Australia at the moment. In December 2012, the stock of Australia’s largest bank by market capitalisation broke through the $60 mark, a value it had only previously reached during the 2007 run-up to the global financial crisis. As it pushed through the heady $70 mark this week, with little sign of abating, investors are wondering how far it can go.

Indeed, the share prices of all of the big four banks with the exception of National Australia Bank are trading above or close to pre-2008 highs. 

While most shareholders seem happy to own bank shares for the generous dividend attached to them — worth an average 7.1 per cent of their underlying investment at present — the question of whether banks are fully valued at their current share prices continues to linger.


Required

A. Calculate the following ratios for the four major Australian Banks for the most recent common financial year.

1. Return on assets

2. Return on equity

B. Explain the factors contributing to the banks’ differing return of assets and return on equity.

C. For each of the banks, compare the earnings per share, price-earnings ratio, dividend payout and dividend yield. Discuss which bank you believe is the better investment.