Chart of the Week: Soft earnings growth outlook for Australian banks
The latest take from our equity research analysts.
Mentioned: Commonwealth Bank of Australia (CBA), Bendigo and Adelaide Bank Ltd (BEN), ANZ Group Holdings Ltd (ANZ)
This week’s chart comes from Nathan Zaia and Oriana Pham with insights from the latest industry pulse for Australian Banks.
Share prices don’t match the outlook for modest earnings growth
The major banks ended 2025 with a weighted-average price/fair value estimate of 1.39, and 0.96 for nonmajor banks.
Bendigo shares fell 20% on news of inadequate management of anti-money laundering risks. ANZ was the top-performing major bank in the past 12 months, after a strong fourth quarter relative to peers. The market is likely attributing a greater chance of cost-cutting success. Commonwealth Bank’s forward multiples cooled from lofty levels.
Lower cash rate only a short-term tailwind
Credit growth is healthy and well supported by public investment, population growth, and solid house prices. The Reserve Bank of Australia’s low economic growth forecast out to 2027 underpins our expectation for credit growth to slow to 4% to 5% per year in 2026.
The cash rate is not expected to move much in 2026 for fear of reviving high inflation, and is unlikely to provide a tailwind to credit growth.
Profit growth anchored on loan growth and cost savings
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 if 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.
On modestly higher NIMs and low-single-digit loan growth, we forecast 5% net interest income growth per year to fiscal 2030. Net interest income is around 85% of revenue. Bad debts are likely to rise, but cost-containment sees cash profits grow with revenue.
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You can find previous editions of Chart of the Week here.
