Australian Banks: Coming Home To Roost

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            [3] => ((CBA))
            [4] => ((JDO))
            [5] => ((MQG))
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This story features WESTPAC BANKING CORPORATION, and other companies.
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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

Australia's major banks once again largely met consensus forecasts in the November reporting season. The sector also has finally seen the sell-off warned of all year.

• Australian major banks again called overvalued ahead of result season
• Banks again posted benign results
• This time, meeting forecasts was not enough to justify valuations
• Results have opened up divergence between Aussie majors
• Buy ratings still the sector's hen's teeth

By Greg Peel

Six months ago, ahead of the May bank reporting season, sector analysts were concerned valuations were too high.

The buzz-phrase at the time was “cost of living”, and the RBA had lifted cash rates to control higher inflation (i.e. the cost of living), suggesting mortgage strain on households on top of generally higher prices would lead to loan arrears and bad debt write-offs, reducing bank earnings.

Given elevated valuations, it was incumbent on the banks to post at least consensus-meeting results to avoid a sell-off, analysts warned.

They did.

Westpac ((WBC)), ANZ Bank ((ANZ)) and National Australia Bank ((NAB)) posted first half FY25 (year-end March) results, while Commonwealth Bank ((CBA)) provided a March quarter update.

Most notably, bad debts were benign. While revenues were lower in the period, the asset quality (bad debt) outcome along with solid market income (banks’ market trading) supported earnings, and dividends.

In the following six months to November, bank share prices continued to rise, and rise, although shares in the supremely overvalued CommBank did peak and ease back in the period. The drivers behind the gains were many, beyond not-as-bad-as-feared earnings results.

After March comes April, and that’s when Trump unleashed hell on global trade. Despite TACO and flip-flopping ever since, global trade uncertainty, and thus economic uncertainty remains to this day. Australia’s AA-rated banks are seen globally as safe havens –equity equivalents of gold-– and hence drew global inflows.

Weakness in China’s economy led to expectations of lower commodities demand, and hence selling in Australia’s resource sector –- funds which typically flow into banks.

Superannuation inflows continue to grow, requiring allocation to the Australian market’s largest sector. Buying begets buying by index-tracking funds.

Just how far could the market push PE multiples beyond their longer-term averages?

Dark Clouds

Looking ahead in May toward November, bank analysts were concerned about a weakening Australian economy, aided by a weaker Chinese economy, leading to rising unemployment.

This, combined with gradually easing inflation, would lead the RBA to continue to cut the cash rate, and that would weigh on banks’ net interest margins (NIM) and thus earnings.

Rising unemployment would lead to rising bad debts. The offset would be lower mortgage rates, but a weak economy would reduce loan demand from both businesses and households. Lower cash rates would impact on bank NIMs.

Unemployment has indeed risen in the past six months, but only slightly, from historically low levels, and has actually been both up and down in monthly figures. Inflation was easing, but has ticked up again recently, albeit largely due to the expiry of the government’s electricity rebates.

As I write, the October CPI numbers have just dropped (now a comprehensive monthly measure consistent with prior quarterly assessments). The headline rate is up to 3.8% from 3.6%, and core to 3.3% from 3.2%.

The RBA Governor Bullock stated earlier this month that “it’s possible that there are no more rate cuts” and “it’s possible there’s some more“. Not exactly helpful, but these latest CPI data suggest the former.

Australia’s economy has not weakened. Loan demand has not fallen –- quite the opposite. The housing market once again has a rocket under it, further fuelled by the government’s first home buyer scheme.

On that basis, fears of a downturn in bank earnings eased into the November result season, but given elevated valuations –-even more elevated than they were in May-– analysts were again warning the banks had better post results that beat consensus, given simply meeting consensus this time would likely not be enough.

Something had to Give

Earlier this month, Westpac, NAB and ANZ reported full-year FY25 results and CBA provided a September quarter update.

Overall, the reporting season demonstrated sector fundamentals are broadly sound, Wilsons suggests, with headline results largely in line with expectations. However, there were some notable differences in underlying trends and relative share price performance across the majors.

Indeed, immediate share price responses to result releases were in opposite directions between the majors. But that is by the by now. The share prices of all four have been in a downward trajectory ever since.

The major banks’ FY25 results saw the benefits of a steadily improving macro environment (economy) over the past six months, Citi notes, with resilient credit growth, stabilising rate cut expectations, swap rates (bank funding costs) that are now in-line with pre-tariff uncertainty and benign asset quality (low bad debts).

In a marked shift from prior halves, Macquarie points out, bank fundamentals showed stronger trends (excluding ANZ). Pre-provision profits rose 1-4% (adjusting for markets income) underpinned by better revenues, while headline earnings remained supported by low impairment (bad debt) charges.

The Breakdown

The key positives in this reporting season for Macquarie were better underlying margin trends, continued solid markets income, and low credit impairments (excluding NAB). The key negatives were higher expenses growth, while capital was mixed (better for ANZ and Westpac, but weaker for NAB).

Credit growth continues to surprise to the upside, Wilsons notes, supporting better-than-expected revenue. System growth remains above trend, at around 6% in home loans and 9% in business lending.

Banks have expressed confidence this pace can be sustained given a healthy macro backdrop; a view reflected in medium-term consensus forecasts.

Costs were a key differentiator. Wilsons notes operating expenses grew faster than expected at CBA and NAB (4-5%), due to higher wages, more frontline staff and tech spend.

On the other hand, ANZ and Westpac are holding up better than expected, guiding to flat (Westpac) or lower (ANZ) costs over the next year, amidst their respective restructuring programs (front-end for ANZ, offering shorter term benefits, back-end for Westpac, suggesting longer term benefits).

Expenses growth was generally a headwind, Macquarie points out, up 3-6% half on half and 3% quarter on quarter. Expense revisions were also negative, except ANZ which gave clear guidance around its cost-out program.

This headwind has seen all banks target greater productivity as they seek to manage elevated vendor and tech inflation. While Macquarie expects expenses growth to moderate in FY26, the broker still sees it remaining elevated at 2-6% (ex-ANZ).

Balance sheets remain broadly healthy on a proforma CET1 (capital) basis, albeit with some key differences across the banks. Westpac is very strong (12.5%), Wilsons notes, supporting potential surplus capital returns (buyback or dividends), while ANZ (12.3%) is also well positioned.

CBA’s CET1 declined unexpectedly in the September quarter (11.8%), while NAB (11.8%) has no meaningful buffer above its target, which could pose downside risk to consensus dividend expectations, Wilsons warns.

Macquarie also found capital (ex NAB) was better, with weak organic capital generation offset by inorganic tailwinds.

Upcoming regulatory change from APRA will be a tailwind for Westpac and CBA, Macquarie suggests, while ANZ’s discounted dividend reinvestment plan (DRP) addresses the broker’s capital concerns.

As a result, Macquarie has removed dividend cut expectations for most banks, but still expects NAB to cut its dividend in the first half FY27.

The majors generally reported lower-than-expected credit impairment/bad debt charges, which has driven modest earnings upgrades.

Westpac and ANZ were the most benign, Wilsons notes, while CBA’s impairment charge was in line with consensus. However, NAB’s bad debts were 6% above consensus, driving modest earnings downgrades.

Looking forward, with lower cash rates and a decline in early arrears, Wilsons suggests impairment charges are expected to remain below through-the-cycle levels across the sector over the medium term.

NIMs were resilient through the half, Wilsons notes, bolstered by deposit repricing early in the half, despite RBA rate cuts and intense mortgage and business banking competition.

However, consensus expects margins to ease over the medium-term, due to ongoing competitive and funding pressures, which will be a key headwind for sector earnings.

With the cash rate easing cycle nearing (or at, for now) its end, margin commentary was generally better (ex-CBA). That said, with replicating portfolio (hedging) benefits easing materially, Macquarie expects margin pressure to remain (better for NAB, worse for CBA).

Those Valuations?

Earlier in the year, Morgans Stanley noted RBA rate cuts of -75-100 basis points would be the “sweet spot” for banks, as this should provide a deposit re-pricing opportunity, boost home loan growth, and keep loan losses lower for longer.

Since December last year, the RBA has cut by -75bps.

Despite concerns that lower rates are bad for margins, the modest easing cycle has been “unambiguously” good for banks, Morgan Stanley notes, with underlying margins slightly up year on year, system mortgage growth tracking higher, SME loan growth remaining strong, and loan loss rates stable.

At the same time, the major banks’ average one-year forward PE has re-rated to circa 19.5x from circa 18.5x.

The key themes from the banks’ reporting season were rising cost pressures and a divergence in asset quality outcomes, Bell Potter suggests, with performance driven by how well each bank had managed these.

Dividend yields across the sector remain low and earnings growth subdued, yet valuations have stretched further, trading well above long-run averages.

Bell Potter maintains an Underweight conviction on the broader banking sector.

Overall, despite minor consensus revisions for individual banks, tying together each of the key earnings drivers, the sector-level earnings story remains broadly unchanged. Wilsons continues to expect the banks to deliver modest, not particularly compelling, low- to mid-single-digit earnings growth over the medium term.

Wilsons’ cautious sector stance and underweight positioning remain unchanged.

Yet, with banks having been sold off since reporting season, are they still overvalued?

The sell-off in the banks, coupled with the relatively divergent performance within the majors this year to date, has raised a number of questions from investors in Citi’s recent marketing. Investors are keen to understand the risks to the ANZ’s and Westpac’s outperformance.

Citi notes “self-help” (restructuring) share price momentum typically gets frustrated by revenue underperformance, and the improving revenue outlook should provide support to ANZ’s ambition to “float” with the market and Westpac’s ambitions to pivot to business.

The stark underperformance of CommBank this year has some querying whether shares have fallen enough to be more constructive.

Citi notes the premium has come under pressure in the past from improving breadth and better franchise momentum in peers, and the recent set of results suggest both of those factors will likely persist into 2026.

UBS suggests the fact we are approaching the end of the year may explain some of the recent sell-off in the banking sector. The sector over the past two years has been a beneficiary of strong price momentum (mainly) with some positive earnings revisions too.

The sector is stable and defensive, UBS suggests, with reasonable earnings visibility but valuation multiples are now unwinding. As an example, CBA is now trading at 24x  forward earnings (mid-November) versus a seven-year average of 19.10x.

Negative price momentum may become self-reinforcing, UBS warns.

To sum up brokers’ general view on the banks going forward, we’ll let a picture paint a thousand words:

It was notable back in May, post the first half season, that among the brokers monitored daily by FNArena, only one Buy rating was in place (UBS for Westpac), with all other ratings either Holds or Sells (and all Sells for CBA, as usual).

Ahead of the November season, the same was true, other than the one Buy rating now came from Morgan Stanley for NAB.

Post the November season…well…there is not one Buy rating for the majors, nor for the two regionals. Between them, the majors have drawn 13 Hold or equivalent ratings and 21 Sells (six for CBA).

Disruptor Judo Capital ((JDO)) remains a clear outlier, enjoying a growth phase, while investment/commercial bank Macquarie Group ((MQG)) can itself only draw one Buy rating, but at least no Sells.

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