Australian Banks: Results Season Preview

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            [1] => ((NAB))
            [2] => ((ANZ))
            [3] => ((MQG))
            [4] => ((CBA))
            [5] => ((JDO))
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            [2] => ANZ
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            [4] => CBA
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This story features WESTPAC BANKING CORPORATION, and other companies.
For more info SHARE ANALYSIS: WBC
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

Back in May, analysts declared Australian banks overvalued. Share prices outperformed since. Heading into the November season, analysts declare banks overvalued.

• Analysts continue to believe Australian banks are overvalued
• Not one Buy rating afforded to the majors or regionals
• Focus on bank restructures
• Macro backdrop improving, but unemployment rising

By Greg Peel

The November Australian bank reporting season kicks off with Westpac’s ((WBC)) full year FY25 result on November 4, National Australia Bank ((NAB)) on November 6 and ANZ Bank ((ANZ)) on November 10.

Macquarie Group ((MQG)) provides first half FY26 earnings on November 7 and Commonwealth Bank ((CBA)) a September quarter update on November 14.

The Backdrop

Macquarie’s Macro Strategy team expects Australia’s economic growth to recover from a weaker pace in 2025 towards pre-covid trends in 2026.

The consumer is expected to drive the recovery as RBA rate cuts flow through, while business investment recovers in 2026. With strong house price growth, improved labour availability, and rate cuts, the outlook for housing construction is improving.

The housing market is accelerating faster than Macquarie anticipated, with annualised price growth lifting to 10%, and household expectations for prices lifting to record highs despite stretched affordability.

With the expansion of the first home buyer scheme (FHBG) from October 1, Macquarie expects the housing market to strengthen further in the months ahead. This has driven the strategists to upgrade their near-term housing credit growth forecast and suggests a favourable backdrop for banks, and non-bank financials.

Unemployment remains a risk to growth in bad & doubtful debts (BDD), and unemployment surprised to the upside in lifting to 4.5% in September.

While this is the highest level since 2021, it remains below pre-covid levels and close to the RBA’s estimates of non-accelerating inflation rate of unemployment (NAIRU). Leading indicators are somewhat mixed, Macquarie notes, but suggest the potential for a slight further deterioration ahead.

That said, given rising house prices Macquarie sees limited risk to credit quality from the modest rise in unemployment.

Elevated Valuations

Heading into the May bank reporting season, analysts warned bank valuations were elevated, and feared a rise in bad debts as cost of living pressures had their impact, particularly mortgage costs, despite surprisingly low unemployment.

The reasons for elevated valuations were several.

In between banks closing their books on the first half in March, and reporting earnings in May, came Trump’s Liberation Day. As share prices crashed globally, Australia’s banks were seen as a safe haven by the world.

While TACO Trump quickly stalled his tariffs, the risk of high tariffs on China impacting on commodity demand and thus the Australian economy had Australian resource stocks being sold off, and selling out of Australia’s second largest sector typically leads to buying in the largest –- the banks.

A typical super fund is index-tracking, and flows into super funds from employees currently continues to exceed withdrawals from retirees, hence more and more needs to be allocated to the stock market, and into the biggest sector in particular.

There are a large number of long-term retail shareholders sitting on significant capital gains from their bank positions, who thus face significant capital gains tax implications if they sell.

Finally, rising bank share prices become self-fulfilling. As the market cap share of the ASX200 rises, index-tracking funds must adjust their portfolio allocations accordingly, buying more bank shares and selling something else, such as resources.

Heading into the May season, analysts declared the banks “fundamentally overvalued”. To that end, banks would have to post reasonable results or swift selling would eventuate.

They did. Bad debts were the biggest surprise, remaining benign. Bank share prices have risen ever since (although CBA has come off its highs to be back around its May level). As of last week, bank share prices have outperformed again, up 17.4% year to date versus the ASX200’s 10.1%.

Heading into the November season, the banks have had a strong run of outperformance. Qualitatively, it isn’t difficult to understand why, says Citi. Credit growth continues to strengthen, margin expectations will benefit from fewer RBA rate cuts now expected, productivity is being addressed and asset quality remains sound.

While bank valuations remain stretched, and Macquarie continues to see downside risk to margins and earnings, the macro backdrop for banks has improved.

Indeed, in the near term, this broker sees upside risk to consensus earnings from faster credit growth and benign credit quality. While in the medium term, margin headwinds are likely to offset these tailwinds, they will take time to emerge, Macquarie suggests.

Macquarie remains Underweight the banks sector.

The Australian bank sector relative to the ASX200 is trading above its historical average but within one standard deviation, UBS notes.

Furthermore, banks globally have had an impressive year-to-date run, with Europe up 42% and the UK up 32%. Australian banks appear fairly or fully priced on UBS’ valuations and with the resources sector now improving in the second half of 2025, there may be some rebalancing ahead, UBS warns.

Despite a reasonable earnings season in May, only one broker monitored daily by FNArena found cause to set a Buy rating on one of the four majors or the two regional banks. UBS had a Buy rating on Westpac, while all the others could score no better than Hold, with CBA typically attracting a full suite of Sells.

UBS no longer has a Buy rating on Westpac. Heading into the November season, there is again only one Buy rating; Morgan Stanley has an Overweight rating on NAB.

There is otherwise only a mix of Holds and Sells, again, with CBA, as always, attracting eight Sells.

The Restructurers

Heading into this season, much focus is on the performance of the two majors which have recently announced restructuring strategies –-ANZ Bank and Westpac-– targeting productivity improvements via updated systems.

The market has received ANZ’s reset strategy announcement positively, with the shares outperforming peers by some 10% over the month and 12% year to date. While the shares are playing catch-up after a period of operational and market underperformance, Citi suggests natural questions arise as to where the shares will settle, and how should we view ANZ versus Westpac as both target 12%-plus returns on tangible equity (ROTE).

Citi believes the Westpac strategy is sound in clearing more than a decade of technical debt, which is being augmented by near term cost-outs as management stay disciplined on productivity.

ANZ’s strategy, in contrast, offers a more pragmatic technical solution in redesigning the “Plus” front-end. Citi believes investors will favour the front-ended productivity benefits and synergies, which are faster and easier to understand versus Westpac’s back-ended “UNITE” benefits.

Overall, ANZ Bank remains Citi’s preferred exposure given a circa -20% discount to Westpac the deciding factor as both aspire to 12% ROTEs.

To Citi, ANZ’s 2030 target looks “large and fast”. While the final leg of ANZ’s return ambitions are revenue-linked, the substantial drivers of the uplift to FY28 are cost-related. Productivity measures are front-ended and more easily controlled by management, as are synergies from the Suncorp acquisition which are targeted at more than 50% of the cost base.

By contrast, Westpac’s UNITE looks sensible to Citi but longer-dated. In contrast to ANZ’s strategy, Westpac’s strategy plan necessitates significant investment upfront, with the productivity benefits from the integration of systems and processes expected from FY28 onwards. Westpac has laid out relative targets as it projects its ROTE and cost-to-income ratios to outperform peers by FY29.

But it takes differing views to make a market.

On balance, UBS thinks Westpac has the biggest potential to surprise to the upside aided by a growing business and institutional portfolio tilt. In a messy and noisy result, ANZ Bank is set to rebase its earnings under its new CEO, UBS suggests, hopefully taking sufficient restructuring charges in the process.

Morgans has downgraded Westpac to Sell from Trim due to recent share price strength.

Westpac has a similar asset base, funding mix and domestic retail concentration as the premium priced CBA, Morgans notes. However, its growth, profitability and return on equity have been weaker than its larger competitor, which is ultimately reflected in Westpac’s lower earnings and asset-based multiples and higher yield.

 If Westpac can improve its financial performance with new management, growth in business banking, technology simplification and regulatory capital improvement (all not without risk of disappointment) then Morgans suggests Westpac may outperform CBA on a relative basis (but is still expensive on an absolute basis).

Morgans has a Trim recommendation on ANZ Bank given its compressed total return potential at current prices. While ANZ may have the lowest trading multiples amongst domestic major banks, Morgans views ANZ as being relatively more complex due to its larger exposures to Institutional (including relatively volatile Markets) and international (particularly New Zealand and US$) activities and greater reliance on wholesale and term deposit funding.

Citi is Neutral on both Westpac and ANZ.  UBS is Neutral on Westpac and has a Sell on ANZ.

As noted, no broker has a Buy rating on either.

The Rest

NAB differentiates itself from its major bank peers with its leading SME banking franchise, Morgans notes.

While this market is less commoditised and offers higher returns than home lending, it also has higher risk and regulatory capital intensity and competition is intensifying.

Alongside NAB’s greater exposure to wholesale funding, Morgans thinks this implies NAB has a higher cost of capital than its retail-focused peers. Previously constrained investment spend has also been lifted.

Morgans doesn’t think NAB’s return on equity-to-cost of capital spread and growth outlook justifies its elevated trading multiples.

As well as being Australia’s largest bank, compared to its peers CBA has the highest return on equity, lowest cost of capital, leading technology, largest position in the residential mortgage market and largest low-cost deposit base, and a loyal retail investor and customer base. But brokers have held almost a perennial view that the stock is relatively “overvalued”.

What’s that definition of insanity?

Whereas CBA shows eight from eight Sells, disruptor Judo Capital ((JDO)) attracts seven from seven Buys. Enough said.

Macquarie Group is more investment bank than commercial bank, but it does wear both hats. UBS suggests Macquarie, which is reporting first half earnings, could surprise to the downside with earnings now 40/60% skewed to the second half.

The risk with the result is that depending on the timing of realisations, the typical reliance on second half seasonality could be greater this year to meet guidance and consensus, Citi warns.

The Last Word

First half bank results back in May were generally in line with consensus.

Updates for the third quarter were more favourable, UBS notes, with banks appearing well-positioned to meet second half expectations. However, earnings quality was impacted by one-off benefits such as gains from credit and net interest margin (NIM) outperformance.

Some of the key themes likely to drive upcoming bank results, UBS offers, could come from cost and efficiency gains and NIM stability given lower price competition and residual replicating portfolio benefits (a form of hedging). Investor focus will be on costs guidance, specifically with regard recent restructurings.

Pricing on both sides of the balance sheet will become key as replicating portfolio benefits fade in FY26 and rate cuts will require banks to more optimally price mortgages, with deposit costs and elasticity tested. UBS suggests volume is a source of earnings upside.

All above views sourced for this article were published ahead of this week’s release of September quarter CPI data. Prior to the release, the month of September jump in unemployment to 4.5% had the market factoring in a near 100% chance of an RBA rate cut on Cup Day.

The jump in headline CPI to 3.2% from 2.1% (largely a result of expiring electricity rebates) has those odds now at zero.

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