ASX bank shares can be a great source of passive income in the form of dividends, but their valuations don't seem as appealing these days.
The recent strength of bank share prices is great for long-term shareholders, but it has reduced the potential of near-term dividend yields. When a share price goes up, new investors won't get as high a dividend yield.
For example, if a company has a dividend yield of 5% and its share price jumps 20%, the dividend yield falls to 4.2%.
That effect has happened with the major ASX bank shares in the last 12 months.
Using the estimates for Commsec, these are the following forecast grossed-up dividend yields for the ASX bank shares in FY25 (including ANZ's lower franking level).
Those yields aren't terrible, but they're not as attractive as they once were.
There's another bank that appeals to me more for passive dividend income.
This is a relatively small, Tasmania-based banking business with a history stretching back more than 65 years. It offers various products, such as bank accounts, term deposits, loans, and insurance.
MyState's merger with Auswide Bank Ltd (ASX: ABA) was recently approved. Based on FY24 figures, this significantly diversifies the geographical footprint of its loans, with 20.6% in Tasmania, 20% in Victoria, 34.4% in Queensland, and 18.2% in NSW.
The exposure to Queensland is appealing to MyState because of "strong fundamental growth drivers."
The combined business will have "improved scale and operating efficiency with a stronger and larger balance sheet and increased funding flexibility." It can invest in profitable growth opportunities, enhance the digital customer experience, improve data, regulatory, risk management, and cybersecurity, and invest in people and systems.
The ASX bank share is expected to achieve pre-tax cost synergies of between $20 million and $25 million per year.
The valuation and dividend yield look very appealing to me. According to the forecasts on Commsec, the MyState share price is valued at 13x FY25's estimated earnings with a forecast grossed-up dividend yield of 7.5%.
The Commsec projections then suggest profit could rise by 16% in FY26 and it could pay a grossed-up dividend yield of 8.1% in FY26.
Those numbers look attractive to me, with good prospects of growth in the medium term.
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