ASX Bank Stocks Hit Record Highs: Are the Big Four Overvalued?

Australia's Big Four banks just delivered one of their strongest reporting seasons in years. CBA (ASX:CBA) hit a record half-year profit, ANZ (ASX:ANZ) shares surged over 8% to all-time highs, and Westpac broke through A$42 for the first time. The ASX financials sector climbed 5.1% in just one week.

But the RBA raised rates to 3.85% this month, inflation is running above target, and households are still feeling the pinch. So the big question is, are bank shares still a good value, or has the market gotten ahead of itself?

What's Driving ASX Bank Stocks to Record Territory?

Put simply, the banks are making more money than expected. CBA, Australia's largest lender, reported a cash profit of A$5.45 billion for the six months to December 2025, beating what most analysts had forecast. The bank also bumped up its fully franked interim dividend to A$2.35 per share, a sign that management feels confident about the outlook.

ANZ told a similar story. Its quarterly profit came in at A$1.94 billion, helped by a cost-cutting push under CEO Nuno Matos that slashed expenses by 8%. For the first time, ANZ's cost-to-income ratio dropped below 50%, a big milestone for a bank that has long trailed its rivals on efficiency. Westpac (ASX:WBC) kept the momentum going with steady lending growth and rising net interest income.

What's helping all of them? Bad debts remain very low; most borrowers are still keeping up with repayments despite higher rates. And investors have been rotating out of beaten-up tech and healthcare stocks into banks as a safer option, a classic "flight to quality" during uncertain times.

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Are ASX Bank Valuations Stretched?

This is where it gets interesting. CBA currently trades at roughly 27 times its earnings. Its long-term average is closer to 18 times. Even more striking, JPMorgan, often considered the best-run bank in the world, trades at just 12 times.

So why are investors paying such a premium? Australia's Big Four operate in what is essentially an oligopoly, four dominant banks with limited competition. That supports stable profits and reliable dividends, which is exactly what investors want during volatile markets.

On the flip side, competition for home loans and deposits is squeezing margins. CBA's net interest margin dipped to 2.04% over the half. And if rates keep rising, more households could start falling behind on repayments.

What Record Bank Profits Mean for Dividend Investors

Bank dividends have long been a cornerstone of Australian income portfolios. CBA's A$2.35 interim dividend is fully franked, and the bank is targeting a payout ratio of 70% to 80% of profits, a level that looks comfortably sustainable.

The catch? As share prices climb, yields shrink. CBA's cash yield now sits under 3%. Even after adding franking credits, the grossed-up yield is around 4%, which is actually below what a 12-month Big Four term deposit pays at roughly 4.25%. That is a trade-off income investors will want to think about.

All eyes now turn to NAB (ASX:NAB), which is scheduled to release its first-quarter trading update this Wednesday, February 18, to see if the "Big Four" rally has more legs.

Key Takeaways

• Earnings are strong: Record profits from CBA and solid results from ANZ and Westpac show the Big Four's businesses are in good shape.
• Valuations are rich: CBA's price tag of ~27 times earnings is well above its historical average and roughly double its global peers.
• Dividends are reliable, but yields are thinning: Fully franked payouts remain appealing, but investors get less income per dollar at today's prices.

The Big Four's results confirm Australia's banking sector is in solid health. But at these elevated prices, the margin for error is slim. For investors looking to understand where the best opportunities lie across the ASX, download ASR's free Top-3 Stocks & Market Outlook Report.

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