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How low do bank share prices have to go before you buy? There is genuine value to be had while the banks are paying for their bad debt sins. Leave it too long and you’re more than likely to miss the ride.

Share prices of major banks have been slashed to the point they appear over-sold and offer genuine value. This is despite the lingering credit crunch and rising bad debts having a negative impact on earnings. But the banks are still posting multi-billion dollar profits.

Analysts say investors taking a one-to-two year view should be rewarded buying the big five banks – Commonwealth, National, Westpac, ANZ and St George – at today’s levels.

Short-term traders can make a quick buck trading bank shares (and others for that matter), but could easily lose if forced to sell in what will be jittery markets for some time.

What analysts and investors like about the major banks are multiple earnings streams and attractive fully-franked dividends. Also, the banks are trading on a price/earnings discount of about 30 per cent to the All Ordinaries index. What concerns them are rising bad debts flowing from the Opes Prime collapse and their collective multi-billion dollar exposure to troubled corporates, such as Allco Finance, Tricom, Centro Properties and MFS Group. And, of course, potential new casualties arising from the credit crunch.

A combination of collectively lifting bad debt provisions by billions of dollars and continuing uncertainty has stripped bank share prices by almost 40 per cent in the past six months. Sharemarket analyst Marcus Padley says the major banks will weather a credit storm that may ruin smaller mortgage providers in a similar fashion to RAMS Home Loans. “Ultimately, the major banks could come through the other side of the credit crunch with an even bigger monopoly after killing off the competition,” Padley argues.

Padley says the majors face short-term challenges that may include higher debt provisions, but ultimately they are a sound long-term investment offering share price upside from these levels. He uses an analogy with agricultural stocks to time buying shares. “You don’t buy agricultural stocks when it’s pouring rain – you buy them when a farmer’s on the front page covered in dust”. The dust, in terms of financial stocks, is the global credit crunch, forcing up wholesale funding costs and interest rates and putting the squeeze on liquidity.

How long the credit squeeze will last remains unclear, but analysts say the major banks will respond favourably to any hint of good news.

Deciding which bank offers the best value differs among analysts after factoring in earnings, bad debts, margin pressure, wholesale funding costs, credit growth and the global economic outlook. Several analysts favour the Commonwealth after posting a solid interim result in February despite the global turmoil of the previous six months. And, despite the CBA increasing its loan impairment provisions, the bank still managed to post an interim net profit-after-tax of $2.385 billion and lift its interim dividend to $1.13 a share – a 6 per cent rise on last year’s first half. The interim profit represented a 4 per cent increase on the previous corresponding period, backed by growth in lending and deposits and a strong performance from wealth management.

Going forward, CBA forecast earnings per share growth that would meet or exceed the average of its peers. It has a history of meeting targets. Scott Marshall, of Shaw Stockbroking, says CBA is the “standard stalwart” of the financial sector, and today’s share price provides an attractive entry point for a company generating billions of dollars of profit in challenging times.

Marshall says the National Australia Bank is in recovery mode and Westpac is reluctant to put its conservative balance sheet at risk by pursuing overseas ventures. “Westpac sticks with its core banking activities which it understands very well,” Marshall says.

Mike Kendall, of Goldman Sachs JBWere, says the National offers the best value among the major banks in terms of earnings and share price growth, according to his company model. Kendall forecasts the National to post a full-year profit to September this year of $5.2 billion. He expects the National’s interim result next month to be “clean without any nasty surprises”.

Michael Heffernan, of Austock, expects St George’s bad debt provisions to be favourably lower than its competitors when delivering a solid interim result next month.

The ANZ’s first-half profit fall of 7 per cent to $1.963 billion last Wednesday had been largely factored into the market, as the bank had previously warned of higher debt provisions of $980 million. The result was in line with expectations and investors immediately pushed the shares higher on encouraging revenue across its businesses.

You can buy the banks for dividends alone, with all the majors yielding above 6 per cent and St George 7.1 per cent. Franking grosses up dividend yields to about 8.5 per cent, and this is particularly attractive for self managed super funds due to a generous tax rate of 15 per cent on earnings and no tax on allocated pensions.

Higher interest rates has lifted term deposits and internet savings accounts to about 8 per cent, but investors may pay up to 45 per cent tax on income if on the top marginal rate.

Company share prices tend to over-shoot, either up or down, courtesy of fear and greed. Comparing bank share price highs and lows of the past six months will disappoint shareholders, but may paint an opportunity at today’s levels.

The Commonwealth Bank was trading above $62 a share in November last year before falling to a low of $36.98 in March this year. While it is almost impossible to pick the peaks and troughs of any stock, bargain hunters clearly believed that CBA at $37 a share had been over-sold and pushed it back above $40 levels. Last week, CBA was trading above $44 a share. National Australia Bank fell from a high of $44.84 a share in November to a low of $25.85 in March. Westpac’s high of $31.32 in November was followed by a low of $20.34 in March. St George Bank’s high of $38.50 in October nosedived to $21.40 in March. And the ANZ dropped below $20 in March, a far cry from its 12-month high of $31.74 in October.

The share prices of all banks are now trading higher than their lows, but way off their glorious highs.