The banks were in focus yesterday after a more than 5% fall from NAB took over 20 points off the ASX 200; we discussed NABs result yesterday here. The sector is sitting in the eye of a property storm and potential recession as the Australian consumer remains under pressure. The issues at NAB are likely to be mirrored at the other major banks to a greater or lesser degree:
- Credit impairment charges are increasing, reflecting higher provisions amid slowing growth, falling house prices and higher rates – mortgage debt is now 3.5x its GFC levels.
- Small business is under increasing pressure, an area NAB and, in particular, Judo Bank have focused on over the years.
Australian banks are caught in a difficult intersection: interest rates are high enough to stress borrowers and inflate funding costs, but not high enough to expand margins meaningfully. Regulatory demands are simultaneously increasing capital and compliance costs, while asset quality is deteriorating. NAB’s profit miss yesterday is an early signal of how these pressures are gaining momentum. However, it’s not all bad news, these negative influences are forcing banks to get more efficient;
- Jobs are increasingly being migrated overseas – every 1000 jobs moved o/s saves a bank $60-80mn.
- AI will ultimately bring improved efficiencies and reduced costs to banks, although there are some initial adoption costs.
So far, the banks have had a fairly lacklustre 2026, with ANZ (+10%) the best performer and NAB (-8%) the worst, but they could be described as defensives in the current environment, especially if you agree with MM that interest rates won’t rise further. We remain comfortable holding an underweight stance towards the banks, with ANZ and Westpac our top picks, but we see no reason to abandon the sector entirely.
- We can see the ASX banking sector making fresh highs in 2027, or another 10-15% higher.
