ASX 200 bank shares had a phenomenal run in 2024, with the S&P/ASX 200 Banks Index (ASX: XBK) soaring 29.75% compared to a 7.49% lift for the benchmark S&P/ASX 200 Index (ASX: XJO).

The following chart shows what happened with the major ASX 200 bank shares last year.

With share prices elevated, would it be prudent to reduce your holdings or cash out altogether?

Should you consider taking profits on ASX 200 bank shares?

Let's canvas some expert views to help you decide whether to take profits on ASX 200 bank shares.

According to The Australian, top broker Morgan Stanley thinks ASX bank share prices have overshot.

Based on consensus estimates, the Big Four banks have a 12-month forward price-to-earnings (P/E) ratio of 18.3. This is well above the decade average of 13.7 and the post-pandemic average of 14.4.

They have a 12-month forward dividend yield of 4.7%.

Morgan Stanley analyst Richard Wiles said:

We believe current share prices are not justified based on the banks' growth and return profile.

Wiles said today's high P/Es reflected the banks' strong balance sheets, low earnings risk, and safe haven appeal.

JPMorgan strategist Kerry Craig said the issue with last year's big winners, such as ASX 200 bank shares and tech stocks, was valuations.

In the Australian Financial Review, Craig said these companies' share prices could fall if they didn't grow their earnings enough to justify their re-rated valuations.

Casey McLean from Fidelity International said bank shares were "at risk given the low growth outlook and high valuation".

Matthew Haupt from Wilson Asset Management also has concerns about the valuations of bank shares.

Haupt puts it this way:

Commonwealth Bank of Australia (ASX: CBA) is now trading at 3.5x price-to-book (P/B) ratio value, while writing loans at cost of capital, worth 1x book value.

CBA's dividend yield of 3% now pales in comparison to the 4.5% return you could earn in a CommBank term deposit.

While they are great businesses, this does not represent value to us.

Haupt said his team preferred undervalued companies with strong assets, such as Spark New Zealand Ltd (ASX: SPK), Telstra Group Ltd (ASX: TLS), Dexus (ASX: DXS), and Challenger Ltd (ASX: CGF).

Mathan Somasundaram, CEO of Deep Data Analytics, said they would sell bank shares because "they are trading at unsustainable levels due to global funds".

Somasundaram advocates reducing exposure to shares and bulking up on cash and bonds for now.

What about dividends?

Hamish Tadgell from SG Hiscock and Co. said some investors were hanging onto their ASX 200 bank shares for the dividends.

However, he said investors "should expect lower future returns, given current valuation and earnings growth expectations".

There's still a chance the banks could stay at their current high share prices if economic conditions remained the same and home loan arrears and other bad debts did not significantly increase, he added.