Popping claims of a banking bubble Bank profits are continuing to grow. Talk of investment bubbles are always great for headline writers. But like the Great Australian House Price Bubble that never was, a grain of salt should be taken with the dark forecasts that we are in the midst of the Great Bank Share Price Bubble. Investors have been flocking to bank shares because of their yield. The 7 or 8 per cent on offer from the big banks, after accounting for franking credits, compares very favourably with the 4 per cent from term deposits. Two years ago term deposits were paying more than 6 per cent. Investors have been chasing the higher-yielding shares, not only those of the banks, but also Telstra and the listed property sector. That has helped to push up the share prices of the higher dividend yielders. Research released on Wednesday by UBS titled "Welcome to the great bank bubble of 2013" said the banks were heavily exposed to higher unemployment and a downturn property markets. It is true that big bank share prices have risen much more than the broader Australian share market. Since the Australian sharemarket started to rally in the middle of last year, bank share prices have risen about 55 per cent compared with an increase of about 30 per cent for share prices in the broader market. Compared to their long-term valuations (share prices to earnings), bank shares are probably about 15 per cent overvalued. But the banks continue to post growing profits. ANZ's share price rose sharply after revealing a big rise in profit on Tuesday and lifting the dividend. Westpac is expected to post a record profit on Friday. Investors believe that lower interest rates are here to stay and the big bank profits add to their confidence. For Shane Oliver, chief economist at AMP Capital Investors, there is a risk of its becoming a bubble but "we are not there yet." The banks are well managed and increasing their profits. One risk would be if interest rates were to rise. But markets are expecting the next move in interest rates to be down. Oliver said economic activity remained weak. Further weakness could increase the banks' non-performing loans and defaults as well as slower lending. But the rise in bank share prices was not even remotely like the bubble in dotcom stocks in the US in 2000, Oliver said. Those technology companies were not even making profits and their shares were trading at astronomical valuations. Michael Heffernan, a senior client adviser and economist at Lonsec share brokers, doesn't believe there is a bubble. He has clients coming out of term deposits and the choices are "pretty clear cut." He said there were seven, good-growth, great dividend-yield stocks that were fairly safe and secure - the big four banks, Telstra, Wesfarmers and Woolworths. "People say that defensive stocks like these are risky," he says. "I do not like labels and if a stock is good, it is good," he said.