Chart of the Week: Headwinds for Aussie banks point to an imminent slowdown
Investor demand is expected to fade and slow credit growth as borrowers face higher costs and reduced tax breaks.
This week’s chart comes from Nathan Zaia and Oriana Pham with insights from the latest industry pulse for Australian Banks.
Tougher conditions ahead but banks stand on solid ground
Bank shares rallied on the most recent results, taking another leg up from already stretched valuations. Net interest margins held up, allowing strong credit growth and disciplined expense management to flow through to mid-single-digit profit growth.
Interest rate increases to combat inflation could boost margins in the short term, but they pose downside risks to credit growth and loan losses into fiscal 2027.
Disruptions to supply chains and input costs due to the war could also lead to more bankruptcies and may even lead to higher unemployment. Artificial intelligence-related job losses have not yet moved the needle on overall employment, but they could contribute to bank loan losses returning to more normalised levels in the medium term.
Higher cash rates to combat inflation will likely slow credit growth
Credit growth remains strong, with total growth of 7.7% on an annualised basis in the three months to February 2026. It is well-supported by public investment, population growth, and solid house prices. With the cash rate now moving higher and the economic outlook more fragile, there could be a downside to our medium-term growth forecast of 4%–5% per year in the near term.
New home loan commitments are expected to remain on a positive trajectory, supported by population growth and rising house prices. But a regulatory crackdown on high debt/income loans is likely to take some heat out of the investor-lending market.
The government’s proposal to change the 50% discount on capital gains is also likely to dampen demand. Investor loans increased 9.2% in the 12 months to February 2026, compared with 6.1% for owner-occupiers. We expect refinancing activity to rise as rates move higher, as borrowers look for ways to combat rising expenses being encountered on multiple fronts.
Changes to capital gains discounts for investors are being floated to help with housing affordability, with reductions to immigration being encouraged by rival political parties - both could place downward pressure on house prices and, by extension, credit demand.
Major bank multiples hard to justify as economic outlook darkens
The valuation divergence between Commonwealth Bank and its peers has narrowed modestly, but in our view, it is still unjustifiably wide. If ANZ Bank can deliver similar earnings growth, but on a cheaper P/E, we expect its discount to peers to shrink.
While no longer cheap, ANZ Group offers the most relative value among major bank peers, with improving operating efficiency. Commonwealth Bank is most expensive on a forward P/E of 25 times, and a fully franked dividend yield around 3.1%.
