Australian Banks: Results Season Preview

Feature Stories | 11:48 AM

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.

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