Australian Banks: Impact Of Oil Shocks And AI

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This story features NATIONAL AUSTRALIA BANK LIMITED, and other companies.
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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

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.

The Banks and AI

Westpac ((WBC)) will provide an update on its Unite technology simplification project on 26 March (tomorrow) and Citi expects the tone to remain measured despite rising investor interest in how rapid AI developments could reshape the program’s scope and budget.

While AI offers opportunities to lift productivity and strengthen testing, stringent regulatory standards and the requirement for flawless accuracy mean it is unlikely to materially change timelines or scope in the near term, Citi suggests.

With the discovery phase complete, 2026 will be a year centred on testing and simplification, before heavier implementation and decommissioning through 2028–29.

Consensus revisions highlight the limitations of Westpac’s relative performance targets, Citi notes, particularly as peer return on tangible equity expectations have risen.

This strengthens the case for Westpac to introduce absolute targets to provide greater clarity and confidence to the market. Credible absolute targets could serve as a positive catalyst if management chooses to set them, Citi suggests.

Increased productivity through AI is a positive, but what of the negative? Increased adoption of AI implies a subsequent reduction in human employees.

Macquarie has analysed the credit risk from AI-driven labour displacement. It’s not all downside, the broker suggests, and there are meaningful cost saving opportunities to capture.

Yet, leveraging proprietary data, Macquarie estimates banking is one of the most exposed industries to AI automation, with some 56% of employees in the highest disruption category.

Macquarie presents three scenarios: gradual AI adoption; a base case; and accelerated AI adoption, for banks to realise these savings.

Allowing for automation potential alongside regulatory and political frictions, the broker estimates banks could reduce full-time employees by circa -10%-30% over a 5-10-year period. However, with AI costs per full-time employee ranging from -$4,000 to -$110,000, net staff cost savings are likely to be smaller, at circa 6%-20%.

This implies 3%-15% upside to Macquarie’s earnings forecasts, with the greatest benefit for CBA.

Under the broker’s accelerated scenario, sector cost-to-income ratios could fall into the low 40s — the lowest level since 2013 (assuming no change to the revenue outlook).

Macquarie expects AI cost savings to be realised across three broad buckets:

(1) reduction in outsourced workforce providers (Westpac to benefit most);

(2) reduction in offshore employees (ANZ to benefit most);

(3) natural attrition of domestic workforce (CBA to benefit most).

However, domestic headcount reduction carries political and social licence costs that the major banks are likely unwilling to absorb, Macquarie believes.

In the broker’s view, this means banks will largely rely on attrition rather than large-scale restructuring, and they are likely to lag other highly exposed sectors in realising savings.

While material cost savings are likely over 5-10 years, in the short term Macquarie believes the need to uplift data and system capabilities will likely mean AI is a net cost.

Further, given the high cost of AI replacement of complex roles, near-term benefits are likely to come from augmentation-driven productivity improvement, rather than full automation.

And there is another side effect of increased unemployment via banking sector lay-offs.

Macquarie thinks material AI cost savings are likely for the banking sector, indeed global peers are already flagging workforce reductions of some -10% over the next five years.

However, they could coincide with increased bad debt charges, as AI-driven labour market disruption feeds through to credit quality deterioration.

While the net effect on earnings will likely still be positive, Macquarie warns credit quality concerns could see bank multiples compress.

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