Investors can sleep peacefully

 <p>THE NEWS OF a fraud case against Goldman Sachs, the world's most profitable financial institution, was quite a serious blow last week for investors' new-found confidence in bank shares. On Wall Street, especially, investors didn't trust the peace. In South Africa bank shares also fell back temporarily, with Standard Bank in particular being singled out because its share price initially fell by just over 3% last Monday. However, overeager commentators forgot that on Monday the share was ex-dividend to the tune of 2% and that its share price therefore had to be lower. </p>
<p>Overall, SA's bank shares are doing very well. In fact, exceptionally well. The graph with the index of bank shares on the JSE shows we aren't even far from the peak of 2007. The table shows at its current 13 414c, Nedbank's shares are just a few cents below their previous peak of 13 950 reached mid-2006. Absa and Standard Bank are also close to previous highs. FirstRand's share price is still slightly lethargic. Investec is a merchant bank and its business model is far more exposed to the international financial markets. Its price has quite some distance to go before it reaches its previous peak of 10 599c/share. </p>
<p>A few analysts are warning the prices of bank shares have run away slightly of late and they're now too expensive for a new investment. However, the consensus view of analysts at McGregor BFA show that's not quite true. Prospective investors only have to look ahead slightly and they should be quite satisfied. </p>
<p>The expected dividend growth over the next three years ensures investors of a future dividend yield of more than 5% on any of those five banks. The dividend is well supported by growth in profits and the forward earnings multiple is on average only around seven. That means current share prices are only seven times the expected profit per share over three years. That's low, especially in a sector in which there could be a good deal of recovery over the next three years. </p>
<p>Investors can sleep peacefully, even though bank shares now look slightly expensive. </p>
<p><img src='http://www.fin24.com/downloads/Media/article_images/fweng_img/2007/sep/ee_ban290410.gif'> </p>