Australian Banks: Global Sanctuary

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

Trump’s tariffs have sent offshore investors scurrying to find safe havens outside US markets. Australia’s banks have been beneficiaries, fundamentals be damned.

-Australian banks outperform during global uncertainty
-Flight to safety outweighs fundamentals
-Little upside risk seen from reporting season

By Greg Peel

While Australian banks’ strong share price performance largely stalled through the March quarter, banks have outperformed the ASX200 by 3% since March. Not because they had been deemed undervalued, or because earnings forecasts were being upgraded, but because they are seen as “safe”.

While US stock and bond markets have stabilised and regained some ground since April 9, when Trump announced a 90-day pause on global tariffs announced on “Liberation Day”, that one week period set off sheer unprecedented market turmoil.

When stock markets plummet, investors typically shift funds to the safe havens of US bonds and the US dollar. But from April 2, both the US stock and bond markets were crashing and the US dollar was spiralling a panic that allegedly led to Trump’s pause after sane heads intervened.

The pause has not nevertheless brought lasting relief, and peak uncertainty remains. In the week April 21-25, Australia’s AA-rated banks, servicing an AAA-rated economy, outperformed the index by 2%, including an astonishing individual 4% pop for Commonwealth Bank ((CBA)) on the Tuesday.

Who was buying?

“Whatever the theory,” noted Citi, “the common thread is that buyers look price indiscriminate, in that they are more concerned with the exposure they are avoiding (ie USD, resources, China risk, tariff risk) than the price that they are paying for Australian banks.”

Tariff Escapees

Investor feedback and Macquarie proprietary flows data suggest offshore investors in particular have been moving into Australian financials given their relatively limited impact from US tariffs. Indeed, the data suggest offshore investors increased their cumulative net buying of financials by some 22% since “Liberation Day”.

Macquarie’s analysis of the data from share registries suggests offshore investors and domestic investors (largely superannuation funds) remain buyers of the banks. Data from banks suggest international and domestic institutions both bought around $800m of bank shares in the March quarter.

By contrast, retail selling totalled -$2.7bn.

While retail investors were clearly in panic mode, super funds were playing the “fireman trade” (running in when everyone one else is running out). But super funds are mostly passive index-trackers, by default constant buyers, receiving incremental compulsory inflows with every pay cheque which then need to be deployed.

ABS data showed super funds remained net buyers of the banks (including Macquarie Group ((MQG)) over the year to December. However, despite this large buying, their relative positioning in banks (relative to the index) was largely unchanged, Macquarie notes, meaning these purchases were driven largely by inflows. Net contributions increased to a record $68bn in the year to December and are likely, Macquarie points out, to increase to $70-80bn ahead.

Interestingly for Macquarie, allocations to Australian equities in general pulled back modestly in December, albeit remain near decade highs. Looking forward, with several funds noting they are reaching capacity for Australian investments, the broker believes incremental inflows will increasingly move offshore, meaning super funds will potentially be a relatively less important driver of domestic flows than they have been over the last one-two years.

Australia’s major banks have outperformed many global peers and the ASX200 since the start of April because they are viewed as defensive stocks in a defensive market. In Morgan Stanley’s view, this investment thesis requires stable margins, single-digit loan loss rates and better capital ratios in the upcoming May reporting season (beginning with Westpac ((WBC)) on May 5).

Fundamentals

Recent buying has led to “full” average PE valuations for the banks, so Morgan Stanley feels share prices are vulnerable to any revenue, credit quality or capital miss, and it’s hard to see what would drive material upgrades.

December quarter net interest margins (NIM) were softer than forecast, but expectations have re-based. They should be broadly stable in the March quarter, says Morgan Stanley, but accompanied by cautious outlook commentary.

Jarden expects small core NIM compression of -2-3bps half on half across the majors, other than ANZ Bank ((ANZ)), mainly impacted by adverse deposit mix-shifts and ongoing lending competition. Encouragingly, deposit pricing remains broadly benign for now. The challenge, suggests Jarden, remains alleviating NIM pressure from lower RBA cash rate expectations, and National Bank ((NAB)) needs to refine its business banking deposit gathering strategy.

Morgan Stanley would be disappointed if guidance for second half/FY25 cost growth is worse than consensus expectations, specifically for ANZ, NAB and Westpac. The broker expects average loan loss rates of -9bps in the March quarter, but sees scope for additional provision “overlays” to reflect heightened global uncertainty.

Jarden anticipates further credit stress with elevated arrears and business insolvencies. However, the conversion to net losses should remain modest, Jarden believes, given low unemployment, elevated asset prices and persistent loan forbearance. Across peers, this broker sees scope for lower-than-expected bad debt charges from ANZ and NAB.

Jarden sees the risk of the banks lifting their CET1 capital targets by 25bps to 11.25%-11.75% as they pre-emptively adopt APRA’s new hybrid capital rules (instruments with a debt/equity mix, such as convertible bonds).

This, coupled with slowing organic capital generation and stronger appetite for business lending, likely sees limited or no fresh share buybacks from NAB. That said, Jarden continues to see all the majors’ capital positions as sound, with CBA best placed. CBA needs a lower share price, says Jarden, while ANZ needs APRA approval.

After poor outcomes as at December 2024, CET1 ratios should move back above 11.8% at ANZ, NAB and WBC, Morgan Stanley believes, hence new capital management initiatives are considered unlikely.

Valuation

Overall, Citi remains negative on the bank sector. Valuations continue to look stretched in absolute terms as well as relative to the resources sectors, from which the bank sector has been a key beneficiary of portfolio switching.

The sector is facing potential headwinds from RBA rate cuts and an economy slowdown; capital management is near completed; and super funds look close to a material index weighting. A number of the “marginal buyers” from 2024 look to be close to having played their course, Citi warns.

While Macquarie agrees with noted safe haven sentiment towards Australian banks in the short term, given limited direct impact from tariffs on Australia, this broker cautions downside risk to earnings from lower rates in FY26.

At face value, market pricing for the RBA (-150bps of cuts in 2025) and recent moves in swap rates imply material downside to Macquarie’s and consensus margin expectations.

Central to bank outperformance has been investor optimism around RBA monetary policy, notes Shaw and Partners, which has pivoted from a prolonged cycle of interest rate hikes to anticipated rate cuts. But with banks now trading at historically high valuations, investors must consider whether these shares have become excessively expensive or if they accurately reflect future earnings growth.

The conundrum is that RBA rate cuts have two contradictory impacts. On the one hand, lower cash rates put pressure on bank NIMs. On the other hand, lower rates lead to greater loan demand. No one believes lower rates will do anything but accelerate mortgage demand and house prices, for example.

But why would an RBA that has to date proven very cautious regarding monetary policy decisions (only one rate cut so far despite lower inflation) suddenly now be expected to implement several rapid cuts? Central banks cuts rates in order to stimulate tepid economic growth, or to fight against slowing growth.

Australia may not be overly impacted by Trump’s tariffs, but our biggest trading partner China is. Thus Australia risks slowing growth and, in turn, weaker loan demand. Moreover, if the RBA cuts swiftly while the Fed marks time, fearing renewed, tariff driven inflation, the interest gap will put downward pressure on the Aussie dollar.

FNArena Major Bank Data					FY1 Forecasts				FY2 Forecasts
Bank	B/H/S Ratio	Previous Close $	Average Target $	% Upside to Target	% EPS Growth	% DPS Growth	% Payout Ratio	% Div Yield	% EPS Growth	% DPS Growth	% Payout Ratio	% Div Yield
JDO	4/1/1	1.76	2.15	22.67	23.3	N/A	0.0	0.0	53.7	N/A	0.0	0.0
MQG	1/3/1	194.43	206.31	6.07	7.0	– 2.1	63.9	3.2	13.5	13.1	63.7	3.6
WBC	1/1/4	32.66	29.51	– 9.97	– 2.0	– 6.1	79.1	4.8	0.7	1.4	79.7	4.8
ANZ	0/6/0	29.55	28.33	– 4.75	6.7	0.3	71.6	5.6	– 1.1	1.4	73.4	5.7
BEN	0/3/2	11.14	10.39	– 7.23	– 16.5	– 1.8	76.9	5.5	– 2.0	0.6	79.0	5.6
BOQ	0/2/3	7.49	6.38	– 12.99	26.0	8.8	67.7	5.0	5.0	5.9	68.3	5.3
NAB	0/3/3	35.95	33.31	– 7.75	0.2	0.7	75.6	4.7	0.1	– 0.4	75.2	4.7
CBA	0/0/6	162.98	109.00	– 33.35	7.8	3.2	78.5	2.9	4.3	4.3	78.5	3.1

(All data as per 30th April, 2025).

What stands out in the above table is a total of only six Buy (or equivalent) ratings from brokers acroiss the sector compared to 18 Holds and 20 Sells.

Take out the non-traditional Judo Capital ((JDO)) and that’s 2/17/19.

Rarely is consensus analyst sentiment this weak. Mind you, six Sells for CBA has been the case since time immemorial, despite ongoing CBA outperformance.

The other stand-out is six of eight consensus target prices having been exceeded — in CBA’s case, by 33.4%.

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