Banks Outperformed In February. What’s Next?

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            [3] => ((ANZ))
            [4] => ((BOQ))
            [5] => ((BEN))
            [6] => ((JDO))
            [7] => ((MQG))
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            [6] => JDO
            [7] => MQG
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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

Australia’s major banks solidly outperformed the index during February following surprisingly positive trading updates. Can the trend continue?

• Solid outperformance from the major banks in February
• Credit growth slower in recent data
• Deposit rates vary significantly
• Will AI prove a hindrance or a help?

By Greg Peel

The 2026 February corporate result season was another in which analysts suggested beforehand that bank results had better be impressive in order to justify elevated valuations, particularly that of Commonwealth Bank ((CBA)).

This was the case throughout 2025, but in each case the majors improved their valuations in due course.

Among the majors, only CBA delivered a first half result, while the others provided quarterly updates.

Morgan Stanley reports the average major bank total shareholder return (capital gain plus dividends) of 12.5% in the month of February was significantly better than the ASX200’s 4.1%.

Among the majors, CBA was the best performer (18.5%), followed by National Australia Bank ((NAB)) on 13.0%, Westpac ((WBC)) on 9.6%, and ANZ Bank ((ANZ)) on 9.1%.

In contrast, the smaller banks underperformed the market. Bank of Queensland ((BOQ)) delivered 3.1% and Bendigo & Adelaide Bank ((BEN)) only 0.4%, while Judo Capital ((JDO)) lost -5.0%.

Are Australian banks thus overvalued?

Morgan Stanley notes the average major bank one-year forward PE multiple rose by 1.7 points to 20.8x, with the increase led by CBA (2.7points).

The majors are now trading at a premium of 6% to the All Industrials ex Banks, marking the first time they have traded at a premium since late 2009 (when recovering from the GFC).

The average major bank one-year forward dividend yield is 3.6%, the lowest level in the past thirty years, Morgan Stanley notes, and the first time it has fallen below the RBA cash rate since mid-2008 (when the GFC was in full swing).

Lending

Bank business loan growth slowed to 5.5% annualised in January following growth in excess of 10% in the December quarter. This compares to 9% in January 2025 and 8.5% in January 2024.

Mortgage growth eased to 7% in January from 8% in December, but was still well above previous January prints, Morgan Stanley notes, of 5.5% in 2025 and 4.5% in 2024. Mortgage growth in January was again led by CBA (5.4%) and Westpac (5.0%), followed by NAB (3.7%). ANZ improved, but still lagged (2.8%).

Morgan Stanley believes the February RBA rate hike (and possibly another one in May) will likely lead to some softening in housing credit momentum.

The majors, other than ANZ, are tracking about in line with consensus loan growth, UBS notes, with Westpac and Macquarie Group ((MQG)) ahead of expectations. Regionals continue to sit below consensus estimates.

Housing lending was softer in January versus December, as noted, with CBA, Macquarie and Westpac capturing 24%, 24% and 19% of the month’s net new business respectively. Regionals were losers, UBS notes, with Bank of Queensland losing -3% and Bendigo & Adelaide Bank flat.

Investor mortgages are currently around a third of mortgage loans and growing at 7.7% annualised versus owner-occupied at 6.2%. CBA and Dutch challenger ING are aggressively taking investor mortgage market share, UBS points out, taking business predominantly from the regionals. Macquarie is growing its owner-occupied book, with NAB growing at 1.5x system growth.

Softer business lending in January saw the majors capturing a super majority of net lending flow, UBS notes, other than ANZ.

Bank of Queensland had a strong month capturing 7% of monthly flow. ANZ has performed poorly in business lending over the past six months with net outflows month on month.

Judo Capital saw net outflows, likely from book run off, but is still growing strongly.

Borrowing

Australian household deposits at banks grew at only a 2% annualised rate in January, the latest data show.  This compares to 7% in both January 2025 and January 2024, Morgan Stanley notes.

In the past three months, NAB and Westpac grew deposits above system, but ANZ and CBA were below.

Deposit growth (7.8% year on year) came predominantly from household deposits (8.5% year on year), UBS notes, with Macquarie, CBA, Westpac and ING the key winners, while regionals were the losers.

Business deposits were flat for the month (8.1% year on year) with ING growing 18% month on month and Westpac performing well in a subdued business lending and deposit month.

Margin pressure risk from deposit competition appears contained near term, UBS suggests.

With one RBA rate hike delivered, all banks have passed this onto savings customers, Macquarie reports, albeit with varying details.

For “behavioural savers”, bonus rates were increased by 25 basis points, in line with the RBA hike, however, base rates were left unchanged.

For simple online savers, ANZ, CBA, and NAB only partially passed through the rate hike onto the ongoing base rates, while Westpac passed none to base rates, opting to pass through only on its introductory offer.

Macquarie estimates the combined effect of this purely on retail customers is a 0.4-0.8bps increase to net interest margins (NIM), more for Westpac and less for ANZ.

Separately, despite banks repricing term deposits upwards, spreads (between deposit and loan rates) still remain highly favourable, which Macquarie expects to be a margin tailwind for banks in FY26.

Given expectations of a modest RBA hiking cycle and steady competition, Morgan Stanley thinks margins will be less volatile than in previous years. In broad terms, this broker expects headwinds from lending competition and changes in deposit pricing and mix to offset the tailwinds from two RBA rate hikes.

As a result, Morgan Stanley forecasts major bank margins to remain largely stable in FY26 and to fall by just -1bp in FY27.

The recent reporting season highlighted the strong inroads that Macquarie is making in the deposit market, Citi acknowledges, yet the strong deposit results in the major banks revealed a conflicting narrative. Looking at the net numbers in the APRA data, Citi can see that Macquarie’s market share gains have largely come from the smaller banks losing share, with the major banks largely unchanged over the past 18 months.

The profitability of the “other banks” sits at only circa 5% return on equity, Citi notes, which is constraining their balance sheet growth and their ability to reinvest, which in turn adds to the market share pressures.

While Macquarie is set to remain a formidable competitor for the major banks, in the near term Citi thinks this competitive risk is going to remain manageable for the major banks as the other banks likely continue to cede share to the industry.

Macquarie continues to outperform the majors with a superior platform and simple fully digitised proposition. At this cadence, Macquarie could surpass 10% market share on both sides of the balance sheet (deposits/loans) in the near term, Jarden suggests.

CBA’s margin edge, based on some 50% of deposits being at no or low cost to the bank, is under assault from Macquarie (75% of January deposit flow versus -17% for CBA), ANZ, NAB and, possibly, eventually, stablecoins, Jarden warns, eerily.

First Home Buyers

With the RBA expected to hike rates two or three times in 2026, the market has understandably become more cautious on the outlook for mortgage credit growth. However, Macquarie believes the impact of the government’s expanded first home buyers grant (FHBG) is being overlooked.

With 84% of aspiring homebuyers constrained by deposit size, Macquarie suggests the expansion of the FHBG could drive a similar rise in FHB activity as was the case with prior stimulus programs in 2008 and 2020. These programs drove a 1-2%pts increase in housing credit growth as FHB pulled forward purchase decisions.

Early evidence suggests the expanded FHBG is already having an impact, Macquarie notes. As at January, this broker estimates 39,000 places have already been taken up, suggesting an FY26 run rate of circa 70,000, up from 46,000 in FY25.

December quarter FHB lending was up 15% quarter on quarter and 22% year on year, with the average FHB loan increasing to a record $608k (up 12%).

Elsewhere, house prices below the increased price caps are materially outperforming those above. In Sydney, the bottom quartile is now outperforming the top quartile by some 14% annualised.

Despite rate hikes, Macquarie sees limited risk to volume growth (assuming the cash rate peaks at 4.10-4.35%), as FBHs offset the slowdown. In this broker’s view, CBA and Westpac are key beneficiaries, NAB is broadly neutral and ANZ will lag peers unless it addresses market share losses quickly.

Macquarie continues to forecast solid credit growth with housing/business credit growth of 7% over 2026 before slowing to 5-6%.

However, with consensus upgrading volume growth over February results, much of the upside Macquarie saw is now factored into forecasts already.

Ai: Hero or Villan?

Surging AI investment suggests upside to credit growth.

Business credit remains robust at some 10% annualised, Macquarie notes. Leading indicators have improved, with non-mining capex plans for FY26 increasing to 10% year on year from 7% and the first estimate of FY27 for 8% growth.

While much of this is driven by IT investment, it still suggests upside risk to Macquarie’s current forecasts.

Despite consensus upgrades, Macquarie continues to see upside to consensus expectations for lending growth in FY26, particularly for NAB and Westpac.

Yet, while major banks assert trust and regulations provide vast moats to retail banking, Jarden contends it might be easily overcome and disrupted by superior product offerings working in combination with AI and tech advancement (blockchain and stablecoins).

The current product set is simple and built largely on inertia with resulting loyalty taxes. While asset (loan) spreads have converged, liability (deposit) spreads remain wide and vulnerable.

It’s not unreasonable, suggests Jarden, to expect an agentic AI bot to, sometime in the future, manage menial administrative tasks for us such as filling out forms, confirming our identity, finding and selecting the best options for home loans and deposits.

Jarden quotes Stripe’s 2025 Annual Letter:

“Over the last few years, the country-by-country expansion model has melted away. The ‘domestic market’ for a new generation of internet businesses is the internet itself… The latest cohort of fintech companies… are building global financial apps right out of the gate… The progress is in large part due to stablecoins, whose borderlessness allows fintechs to set up infrastructure that works everywhere…”

Jarden also quotes the latest report from the RBA’s think tank:

“The global financial system has reached a pivotal juncture. We are witnessing a once-in-a generation transformation where Digital Finance is moving beyond a peripheral innovation – it is becoming a foundational layer of the global financial system.

“The technologies at the centre of this shift (eg tokenisation…blockchain…stablecoins) are proving their value across markets, payments and deposits, assets and collateral systems, and increasingly shaping a more efficient, inclusive and transparent global economy.

“More efficient cross-border payments can support growth in trade and capital flows internationally, while streamlined, programmable financial infrastructure can enable new markets, attract international financial services to Australia and integrate more effectively with complementary technologies such as AI.”

The major banks are presented with an array of threats and opportunities, and Jarden remains surprised at their lack of voice to date on this IT advancement.

Industry feedback suggests NAB shuttered its investment initiated under previous CEO Ross McEwan, CBA paused activities with Gemini, Westpac is unknown but ANZ is beavering away on a number of stablecoin initiatives.

The Outlook

Following a positive reporting season, Morgan Stanley believes the banks’ earnings upgrade cycle, solid balance sheets and low risk profile will continue to support investor interest.

While bank PE multiples typically de-rate during an RBA hiking cycle, recent results are likely to keep valuations elevated in the near term.

However, Morgan Stanley believes the sector is late in its outperformance cycle, with de-rating risks rising as the year unfolds. These include downside risks to the economy, loan growth and credit quality from the combination of monetary and fiscal policy pivots, the potential for another outbreak of competition as the five largest banks try to implement their strategies, and execution risks around transformation and productivity agendas.

The broker thinks elevated expectations and multiples skew the risk toward underperformance versus the ASX200 in 2026 rather than another year of outperformance.

CBA and Westpac continued to show the strongest signs of volume growth in the recent results, Macquarie notes, growing slightly above system in mortgages, and well above in business lending (more than 2x). NAB’s mortgage growth is partly weighed on by the closure of its Advantedge product, but business lending is also just broadly in line with system.

Meanwhile, ANZ continues to materially lag peers, shrinking its business book, and showing little growth in mortgages. All major banks are showing reasonable growth in household deposits (ANZ slightly lagging), yet lending growth still outstrips deposit growth at CBA and Westpac, resulting in a negative funding gap.

Pre-provision earnings trends were stronger across the banks. While 2-5% consensus upgrades over results have incorporated much of the upside, given strong economic data, earnings risks remain skewed positively, Macquarie believes, with volume growth and the rate environment potentially surprising to the upside.

As such, Macquarie maintains a Neutral sector view for now.

In the wake of the bank reporting season last November, when ANZ, NAB and Westpac reported FY25 results and CBA provided a quarterly update, brokers monitored daily by FNArena covering the banks could not between them come up with one Buy rating for any of the majors or the two regionals.

The majors instead drew 13 Hold or equivalent ratings and 21 Sells.

Six from six of those Sell ratings were for, as always, CBA. By contrast, Judo Capital scored six from six Buys. The only other Buy rating –-and there was only one of them-– was for Macquarie Group.

Fast-forward to now and the picture has changed somewhat:

Judo remains the most favoured, with the consensus target price suggesting 38% upside from the last trading price (March 6), implying the market is undervaluing the (small cap) disruptor.

Bank of Queensland is a surprise with three Buys, as the consensus target price suggests no upside and broker commentary appears downbeat for the regionals.

Macquarie still attracts some support, and thereafter come the majors.

CBA is in a familiar last position, still with six from six Sells, while Westpac cannot attract a Buy rating either. Consensus targets suggest both are trading well over consensus valuations.

Thus despite recent outperformance, brokers are generally slightly more favourable towards the banks than they were back in November.

Post Scriptum

On Monday morning, bank sector analysts at Citi offered the following commentary:

“We believe the recent underperformance of “high beta” banks JDO and MQG, driven by broader economic and market concerns, is overdone.

“While MQG faces unquantifiable risks from private credit and technology exposure, near-term positives like increased commodity volatility and a significant asset realization should provide offsets.

“JDO, despite economic growth uncertainties, benefits from supportive deposit costs and a strong pipeline.

“Consequently, we maintain a Buy rating on JDO and a Neutral rating on MQG, but think valuation support is emerging in both names given their underperformance relative to the broader banks sector.”

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