The mining boom is over, interest rates are low, China is slowing and the RBA is worried. Investors, in what may well turn out to be a state of mass delusion, are rushing to the 'safety' of the big banks. Commonwealth Bank's share price has more than doubled since the Global Financial Crisis and price-to-book ratios for the big four are at the top end of their historical averages.

All this hides a nasty little fact; while banks look like defensive, high yield investments, they're actually highly cyclical, highly leveraged economic plays. Recessions tend to wreak horrible damage on bank share prices. But because we haven't had one for so long many investors have forgotten that fact. All of which means none of the risks the Australian economy faces, including a burgeoning Sydney property market, are reflected in bank share prices. All are trading at record highs, priced as if we were at the beginning rather than the end of a mining boom.

Even investors that accept the inherent risks in the sector struggle. By submitting your email you are agreeing to Fairfax Media's terms and conditions and privacy policy. Well, there is a bank that's far cheaper than Commonwealth but just as dominant, one that has dealt with a deep recession and is emerging from it in fine shape.

You'll have to go to the United States to find it. Enter Wells Fargo, the venerable US bank founded in Before you think that's all too hard, consider four reasons that investing in US banks might offer better returns than their local counterparts. First, unlike the Australian economy, which potentially faces a marked slowdown just as housing prices and consumer debt levels approach pre-GFC peaks, the US economy is still recovering.

That's great news for US banks, which can increase their lending as unemployment falls and confidence returns. For the same but opposite reasons, it's bad news for CBA and the rest of the big four.

Second, whilst investment bankers tried really hard to kill the global economy just to boost their bonuses, it's good ol' fashion housing busts that generally do the most damage. Over half Westpac and CBA's total assets are in housing loans, double that of their American counterparts.

That makes our banks particularly exposed to a crash. Moreover, the US property market has busted and is now recovering; ours is still booming. Third, higher interest rates might actually help rather than hinder US banks. Mark Curnin of White River Capital estimates Wells Fargo's earnings could increase 25 per cent if net interest margins returned to normal, even after allowing for a 1 per cent increase in bad loans.

ASX:CBA (Commonwealth Bank of Australia) | Motley Fool Australia

Can you imagine that happening here? Fourth, US banks are benefiting from growing market shares strong regulatory capital ratios and lower bad debts. Even litigation payouts are declining. In Australia, where household debt is at record highs, it makes sense for banks to hold onto more profits for a rainy day but they're not doing it.

Accounting standards compel them to get caught up in the rush to yield by paying out more profits as dividends. That makes them even more susceptible to an economic shock. If none of these factors entice you to consider sacrificing some fully franked dividends by selling how much for earnest money Australian banks and directing the proceeds to US counterparts, we have one more card up our sleeve.

Since the GFC, the return on equity plc stock market of Australia's major banks have rocketed off the charts.

By international and historical standards Australia's bank valuations have never been more expensive. In comparison, US bank profits are depressed by low interest rates and high litigation costs, particularly in the case of Bank of America. Whilst local banks are expensive US banks are cheap.

Right now, Commonwealth Bank trades on a PER of 16 and a price-to-book ratio of almost three, a measure only exceeded twice before, in and ominously. The US bank that most resembles CBA, Wells Fargo, trades on a PER of around 12 and, dollar-for-dollar, is more profitable. Its return on assets reaches 1. Even Wells' return on tangible equity of 17 per cent is not that far behind Commonwealth's ratio of 22 per cent, despite being half as leveraged.

You get the picture. By absolute and historical measures Wells Fargo is cheap and lower risk while Commonwealth Bank is expensive and more risky. All you need now is a broking account that allows you trade international stocks to take advantage of the opportunity, and that isn't as difficult as it sounds. What if you can't bring yourself to sell out of CBA completely?

Reduce your big bank holdings to no more than 10 per cent of your portfolio's value and buy Wells Fargo with the proceeds. This article contains general investment advice only under AFSL Authorised by Nathan Bell. Menu The Sydney Morning Herald News site of the year.

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