Chart of the Week: Modest earnings growth at odds with overvalued bank shares
The latest update from our Industry Pulse report.
This week’s Chart of the Week comes from our Q3 2025 Industry Pulse for Australian Banks.
We find that the major banks are mostly expensive, with ANZ presenting the best value among the big four.
Results season saw Commonwealth Bank’s earnings devoid of any surprises with single-digit growth, stable margins and low bad debts representative of current industry conditions.
However, its shares underperformed in the quarter, as investors appear to be warming to less expensive banks showing progress on cost savings and margin improvements. The valuation divergence between CBA and its peers has narrowed, but in our view, is still too wide and unjustified.
Valuations stretched given benign earnings growth outlook
The major banks ended the quarter with a weighted average price/fair value estimate of 1.45, and 1.10 for nonmajor banks.
The lower cash rate might prove a short-term tailwind. The Reserve Bank of Australia’s low economic growth forecast out to 2027 underpins our expectation that credit growth slows to 4% to 5% per year in 2026.
CBA recently relinquished some gains, but remains the top performing major bank in the past 12 months. We don’t believe any economic or industry data explains the strength in prices.
ANZ Group offers the most upside from improving operating efficiency and successful integration of Suncorp Bank. Nonmajors Bank of Queensland and MyState Bank have relatively weak funding positions, but industrywide loan and deposit repricing is beneficial, and should see both become more competitive again in the medium term.
Modest medium term improvement of margins
The net interest margin (NIM) is one of the key indicators of a financial institution’s profitability and growth. The metric is used to calculate the spread of earnings earnt on interest in loans compared to earnings paid by interest on its deposits.
Margins could soften in the short term as cash rates fall, but we expect a modest improvement in the medium term. We expect banks to gradually lower rates on savings and term deposits relative to the cash rate, and discount new home loans less.
With generally stable NIMs and low-single-digit loan growth, we forecast 5% net interest income growth per year to fiscal 2029. Net interest income is around 85% of revenue.
The full report is available to Morningstar Investor subscribers and trialists.
You can find previous editions of Chart of the Week here.
