Australian Banks: Impact Of Oil Shocks And AI

Australia | 2:06 PM

Analysts discuss the potential impact of the current oil shock on Australia’s banking sector and of increasing AI adoption.

• Oil shocks historically lead to economic slowdowns
• Inflation and higher interest rates put pressure on consumers and businesses
• Impact on credit growth and loan arrears
• AI adoption brings costs as well as benefits

By Greg Peel

UBS is receiving more incoming questions from clients on whether geopolitical events in the Middle East could cause any growth shocks to the Australian economy, which, in turn, could impact on bank asset quality via cost-push inflation and higher-than-expected interest rate increases.

The short answer, in UBS’ view, is it is unlikely as consumers and business are “battle hardened” from the impact of 4.25ppts of interest rate increases over the past four years.

Macquarie is not so sure.

Oil and the Banks

While banks are not directly exposed to higher oil prices, the second order effects can be meaningful, Macquarie warns.

Sustained periods of disruption in energy markets have historically been associated with subsequent economic slowdowns.

Over the past 50 years, major oil price shocks, often driven by geopolitical events or supply constraints, have frequently coincided with, or preceded, periods of weaker economic growth, Macquarie notes.

Persistent increases in energy prices act as a tax on households and businesses, lifting inflation, compressing real incomes, and tightening financial conditions.

Given inflation was already stubbornly above the RBA's target, sustained higher oil prices have only increased pressure for more rate hikes.

The market is now pricing a terminal rate of more than 4.6%. This, along with the inflationary impact, are likely to pressure consumers and discretionary spending, which could weigh on credit growth and contribute to higher loan arrears.

Overall, Macquarie expects sustained higher energy prices to be negative for bank earnings and valuations.

While the current situation remains highly uncertain and fragile, Macquarie expects banks to take provision overlays in upcoming results, with impairment charges likely to rise from the broker’s current base case.

Macquarie downgrades FY26 earnings by -1-2% and FY27 by -1% from a circa 10%-35% increase in forecast impairments.

Banks have outperformed the market by up to 9% since the conflict began.

Given the balance of risks is skewed to the downside from here, Macquarie is taking a more cautious view on the sector, moving to an Underweight positioning on the sector and downgrading National Australia Bank ((NAB)) to Neutral from Outperform.

Mixed Exposures

Morgan Stanley believes the domestic economy will be impacted by tighter monetary and fiscal policy in 2026.

In addition, the second order impacts of disruption to oil markets could increase the probability of an economic slowdown. This makes banks vulnerable to both earnings downgrades and a de-rating, in this broker’s view.

Developments in the Middle East are volatile, but Morgans Stanley’s macroeconomic analysts have noted Australia may be one of the first economies to face a meaningful disruption linked to diesel.

The energy analysts have also identified various diesel-intensive industries in Australia, which include mining (some 34% of diesel use), transport (26%), commercial services (11%), agriculture (10%), construction (9%), and manufacturing (3%).

Morgan Stanley believes that:

(1) NAB (circa $127bn) and ANZ Bank ((ANZ)) ($124bn) have the most total exposure;

(2) NAB has the most as a proportion of total exposures (11.5%) and as a proportion of non-housing exposures (21.5%);

(3) Commonwealth Bank ((CBA)) has the least exposure (6.5% and 14%, respectively);

(4) NAB has the highest exposure to agriculture and construction;

(5) ANZ has the highest exposure to manufacturing and mining; and

(6) CBA has slightly more exposure to transport.

Credit quality should remain sound at the end of March, Morgan Stanley suggests, but banks could increase collective provision coverage by reassessing their “downside scenarios” and raising “forward looking adjustments” or “overlays” for industries exposed to the change in operating conditions.

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