The outperformance of Australia’s Big 4 Banks over the last 12-24 months has been extraordinary considering valuation multiples have been demanding (if not extreme) for this entire time period, while the sector’s earnings trajectory has remained uninspiring at best.
While we continue to view the sector as a whole (and particularly market-leader, CBA) as fundamentally overvalued, we acknowledge there are technical factors supporting the rally. The sector has benefited from a ‘flight to safety’ out of the resources sector amidst China’s economic woes, which has weighed on commodity prices and the miners/energy producers exposed to them.
More recently, the Big 4 are have also offered a degree of relative safety amidst the global macro uncertainties caused by Trump’s ongoing trade war, which has allowed the sector to attract renewed interest from both domestic and offshore investors, despite already full valuations.
With the Big 4 Banks having such a large position in the ASX 200, at ~23%, these trends are being exacerbated by ‘forced buying’ from passive/index-aware funds, while the sector has also seen significant buying from momentum-chasing quant funds.
Moreover, we note there are also a large number of long-term retail shareholders of the banks that are sitting on large capital gains (thus creating meaningful capital gains tax implications), which has arguably constrained aggregate selling pressure across the sector.
We are cognisant of these factors, however, our cautious view towards the sector is driven by our assessment of the fundamentals, which continue to show that by any relavent measure, the sector (at the index level) is unjustifiably expensive.
In this report, we explore this sector view, recap the recent interim results of Westpac (WBC), ANZ and NAB, and reiterate our positioning within the sector.
Too Big a Price for Too Little Growth
Notwithstanding the technical factors that have supported the Big 4 Banks’ share prices, we remain convicted that risks are skewed to the downside for the sector over the medium-term.
With the ASX 200 Banks index trading two standard deviations above historical averages on both an absolute and relative basis despite lacklustre earnings growth estimates, the sector is ultimately priced for a significant consensus upgrade cycle. This is tough to envisage in the context of an RBA rate cutting cycle and intense competition from both incumbents and non-traditional lenders, both of which are likely to present headwinds to Net Interest Margins (NIMs) and hence earnings.
Excluding CBA, the remaining Big 4 Banks are more reasonably valued
However, it is clear that the ASX 200 bank sector’s premium is largely driven by the extreme valuation of index heavyweight Commonwealth Bank (CBA), while the rest of the Big 4 Banks (ANZ, Westpac, NAB) trade at more reasonable levels relative to history (albeit with limited growth). This dynamic is shown in Figure 5.
There is little debate that CBA is Australia’s highest quality bank, given its dominant position in the domestic mortgage market, strong management track-record (with notably fewer ‘blow ups’ than its rivals), sector-leading profitability (as measured by ROE), and its digital/technology leadership. It follows that CBA deserves a premium to its ASX peers to account for its superior quality and delivery over time.
However, at a forward price to book of ~3.6x and a forward PE of ~27x, which is close to four standard deviations above its long-term average, CBA’s valuation cannot be justified fundamentally – particularly given its tepid growth outlook. To illustrate, CBA trades at roughly double the P/E multiple of JPMorgan which is widely considered to be the best managed and highest quality bank in the world. This is also despite JPMorgan’s superior scale, stronger growth profile, and superior profitability, which is shown in Figure 8.
Overall, we continue to view CBA as significantly overvalued at current levels, leaving the company vulnerable to a meaningful de-rating in its valuation over the medium-term.
Accordingly, we are comfortable maintaining zero exposure to CBA within the Focus Portfolio, with our preference being towards ANZ and Westpac which offer attractive relative value for similar growth (see Figure 10).
| CBA | JPMorgan | ||
| Valuation | Price to earnings | 26.8 | 13.5 |
difference to 10yr avg | 60% | 16% | |
Price to book | 3.6 | 2 | |
Dividend yield | 3.0% | 2.3% | |
Sellside analyst consensus - buys/sells | 0/12 | 14/0 | |
Upside/downside to consensus price target | -30.9% | 3.2% | |
| Profitability | Return on equity | 13.5% | 15.6% |
Return on assets | 0.7% | 1.2% | |
Net interest margin (NIM) | 2.1% | 2.6% | |
Efficiency ratio | 45.3% | 53.9% | |
| Scale & Growth | Market position (residential mortgages) | #1 | #1 |
Market capitalisation (A$bn) | 280 | 1, 135 | |
Consensus EPS upgrades - last 6 months | 4.0% | 9.1% | |
3 year consensus cash EPS CAGR | 2.1% | 2.7% | |
Number of branches | ~710 | >4,700 | |
| Balance Sheet Quality | Core-tier 1 capital ratio* | 13.8% | 16.5% |
Non-performing loans / total loans | 1.00% | 0.63% |
All measures are based on 12-month forward consensus forecasts unless otherwise stated. *CET1 ratio is shown on an internationalised basis. Source: Refinitiv, Visible Alpha, Wilsons Advisory.
Waiting for a De-rating….
While the exact timing of when the bank sector’s (and particularly CBA’s) valuation will once again reflect the underlying fundamentals is uncertain, in our view there are two key catalysts that could cause the sector's valuation to de-rate.
- Resources rotation –
improvements in sentiment towards commodities (and the mining/energy companies leveraged to them) could trigger a rotation of capital back into the currently 'un-loved' resources sector. With China currently stimulating its economy (and more relief potentially on the way) and US-China trade talks progressing positively, we see the potential for resources stocks to rally over the near/medium-term as global growth concerns abate. If this occurs and sentiment towards the resources sector improves, the bank sector will be the clear funding source for many ASX investors. - Earnings downgrades –
a key factor supporting the bank sector's resilience has been its ability to broadly deliver against consensus earnings estimates, and thus offer a degree of ‘relative safety’ amidst a challenging market earnings backdrop. If consensus earnings momentum turns negative in the sector on the back of analyst downgrades, the banks stands to lose their 'safe haven' status. Earnings downgrades could come from a) intense competition in mortgage and business lending markets (downside risk to NIMs), b) interest rate cuts (downside risk to NIMs), or c) cost pressures (tied to staff costs and project spend). With bad debts remaining subdued and the outlook for credit growth being well supported (explored below), these areas appear less likely to result in analyst downgrades.
Interim Bank Sector Reporting Season Review
ANZ, Westpac and NAB have all reported their 1H25 results, which are detailed in Figure 9.
Some of the key themes from across the sector have included:
- Margin headwinds – each of the banks’ interim results saw underlying NIMs decline amidst headwinds from intense competition in the mortgage market and business banking (from both traditional lenders and new entrants), which has been a key drag on bank earnings. Looking forward, NIMs are likely to face pressure from RBA interest rate cuts, which underpins consensus expectations of softer margins over the medium-term.
- Bad debts still subdued – there are no clear signs of strain on housing credit, with arrears and bad debts remaining relatively subdued. In 1H25, ANZ, Westpac and NAB all surprised consensus to the downside on credit impairments despite market concerns around the impact of elevated interest rates and cost of living pressures. This has been a key source of consensus upgrades for the banks over the last year.
- Balance sheet strength – the Big 4 Banks remain well capitalised with CET1 ratios being broadly around the ~12% level and each bank remaining comfortably above APRA’s ‘unquestionably strong’ target range of 11-11.5%. This has provided the banks flexibility to return capital to shareholders, with WBC and ANZ both having ongoing share buybacks worth >A$1bn.
- Costs better than feared – while costs are a key risk amidst significant project/investment spend, including WBC and ANZ’s respective tech overhauls, interim results generally featured in-line or better than expected operating expenses. That said, this will remain a key risk over the medium-term.
Sector Positioning – ANZ and Westpac Still Preferred
In light of the bank sector’s demanding headline valuation (driven by CBA) and uncompelling growth outlook, we are comfortable with the Focus Portfolio retaining a meaningful underweight exposure to banks.
Our preferred exposures are ANZ and Westpac, while we are underweight both CBA and NAB with zero exposure to these companies. Figure 10 summarises our positioning within the sector and highlights key fundamental metrics for the Big 4 Banks, while we have detailed our company-specific investment views for each of the banks in Figure 11.
| Company Name | Ticker | Result summary |
| NAB | NAB | NAB’s 1H25 result beat expectations after the bar was lowered following a weak 1Q25 update in February. Cash NPAT increased +0.8% HoH to $3.58b, above expectations of $3.48b. Cash EPS of 114.5cps was also above expectations of 111cps and its interim dividend of 85cps was in line with expectations. The result was driven by very strong operating income performance from Markets and Treasury (M&T), increasing 36.7% HoH as well as credit impairment charges being materially lower than consensus (9 bps of average loans vs consensus 14 bps). Group NIM was flat at 1.7% (vs consensus of 1.69%), albeit ex M&T fell 3bps vs pcp. Costs increased less than expected (+1.4% to $4.8b vs consensus $4.9b) albeit this appears to be partly timing related, while the CET1 ratio of 12% was in line with consensus. NAB's buyback has completed. |
| ANZ | ANZ | Overall, ANZ’s 1H25 result was broadly in line with expectations. Cash NPAT increased +12.4% HoH to $3.56b (vs consensus $3.53b), with weaker revenue offset by lower costs and credit charges. Cash EPS of 117cps and an interim dividend of 83cps (70% franked) were both in line with consensus. Costs were a highlight, increasing +3.9% HoH to $5.7b, less than expectations of $5.9b, while ex-Suncorp costs fell -1% HoH which is impressive considering ANZ's tech and regulatory spend. Credit impairment charges were lower than expected (4bps of average loans vs consensus 6bps). Disappointingly, ANZ's NIM decreased -2bps to 1.56% (vs consensus 1.58%), a touch below expectations, and its CET1 ratio of 11.8% was slightly below consensus (12%). On the capital management front, $1.2bn of ANZ's on-market share buyback remains. |
| Westpac | WBC | WBC’s 1H25 result was mixed. WBC's NIM fell 9bps to 1.88%, which was below consensus of 1.92%, driving a ~3% basic EPS miss (actual 96.7cps vs consensus of 100bps) and downgrades of 3%/6% to consensus EPS for FY25/26. WBC's interim dividend of 76cps also fell slightly short of expectations of 80cps. On a more positive note, credit impairment charges remain relatively subdued, at 6bps of average loans (vs consensus of 7bps), as 'households are proving resilient and levels of business stress remain low'. Operating expense growth (+2.7% HoH) was in line with consensus amidst the bank’s tech overhaul. Meanwhile, WBC's balance sheet remains strong, with its CET1 ratio of 12.2% being better than expected. On the capital management front, $1.1bn of WBC's on-market share buyback remains. |
Source: Visible Alpha, Wilsons Advisory.
| Company Name | Ticker | Strengths | Weaknesses | Investment view |
| ANZ | ANZ | ANZ has a highly attractive valuation relative to peers and history. The Suncorp acquisition has improved the scale and diversity of ANZ's loan book and should unlock synergies (and an improved ROE) over time. Moreover, the rollout of ANZ's new tech stack (retail platform: ANZ Plus; institutional platform: Transactive) should improve the customer experience and drive efficiencies. ANZ also benefits from its diversified operations, with a strong presence in institutional banking (alongside above-system growth in the mortgage market). Lastly, ANZ has an attractive capital returns profile. | ANZ has historically had a higher cost-to-income ratio and a lower ROE than its major peers. There are also integration risks associated with Suncorp Bank, with the potential for the market to be disappointed around ANZ's realisation of synergies (vs targets). Moreover, there are execution risks associated with the rollout of ANZ plus and Transactive. Until ANZ's tech rollout is complete, it will endure dual systems costs (legacy and new system). Lastly, ANZ's management team is brand new, with Nuno Matos formally starting as CEO earlier this week. | Overweight. ANZ is the most attractively valued Big 4 Bank by far on both a P/B and P/E basis. While there is some uncertainty, we expect the integration of Suncorp to support continued momentum in the mortgage market and unlock synergies over time. The rollout of ANZ's new tech stack, if smooth, will also improve ANZ's value proposition and drive efficiencies. These initiatives, under the stewardship of a rejuvenated leadership team, provide a pathway to improved profitability over the medium-term. Everything considered, the risk/reward for ANZ is attractive relative to peers. |
| Westpac | WBC | Westpac is the #2 player in the mortgage market. The bank is undergoing a cost-cutting program and digital transformation initiatives focused on back-end tech consolidation (UNITE program), which is laying the foundation for sustainably higher ROE over the medium-term. WBC is also pivoting to higher-returning segments including business and institutional banking, which has strong strategic rationale. WBC also has an attractive capital return profile (with significant excess franking credits). | The implementation of WBC's cost-cutting initiatives and UNITE carry inherent execution risks and could prove challenging. If WBC fails to deliver against its targets, and relative to market expectations (on costs, timing, and targeted productivity benefits), the stock could experience consensus downgrades or de-rate. Separately, WBC's management team is relatively new and unproven with Anthony Miller having been appointed to CEO in December 2024. | Overweight. WBC is attractively valued on a P/B basis compared to CBA and NAB, while it also has a credible path to realising earnings upside from its cost-out initiatives and digital transformation programs. The market is still sceptical of the outcome of these programs, but if they are executed successfully, they should drive increased profitability (ROE), a stronger growth outlook (compared to consensus) and a re-rate in WBC’s valuation. |
| Commonwealth Bank | CBA | CBA is Australia's highest-quality bank, with a leading position in the home loans market, a sector-leading NIM and ROE, and meaningful leadership over its peers with respect to its digital offering. CBA has a strong and stable management team with Matt Comyn being CEO since 2018. Over the last decade, CBA has been the standout when it comes to earnings delivery. | The major drawback of CBA is its extreme valuation premium, which makes it the most expensive bank in the developed world (and in history). Currently, CBA's forward price/book is at a 145% premium to the average of its three major peers. Due to its high valuation, its dividend yield is unattractive at just 3% (vs the ASX 200 at ~4%), meaning CBA is now somewhat unattractive for income investors. | Underweight. Although CBA is high quality and deserves a premium to its ASX peers for its superior earnings delivery in recent years, its premium is unjustifiably excessive. This leaves the stock prone to its multiple de-rating if it disappoints consensus, or when the technical factors supporting its share price abate. Over time, we expect CBA's share price to more closely reflect its (uncompelling) growth outlook. |
| NAB | NAB | NAB is Australia’s leading business lender which, in conjunction with sound cost discipline, has historically been a key differentiator that has underpinned strong lending margins and an attractive ROE (second only to CBA). With NAB being focused on business banking, it has taken a 'step back' from the highly competitive mortgage market over the last couple of years. | NAB faces intensifying competition in business banking, which is putting pressure on funding costs and necessitating heightened OPEX to defend its incumbency. This is a structural headwind to NAB’s historically attractive ROE. NAB’s management has recently faced instability, with Andrew Irvine starting as CEO in 2024, while its CFO was recently poached by Westpac and its head of business banking also recently departed. | Underweight. We are cautious towards NAB due to the threat of continued intense competition in its business banking segment, which undermines the appeal of NAB's business banking leadership and has put pressure on its ROE. Historically, NAB's attractive ROE has justified its P/B premium to ANZ and WBC, although this is hard to justify considering the current structural headwinds, as well as NAB’s uncompelling EPS growth outlook. |
Source: Refinitiv, Visible Alpha, Wilsons Advisory.
Written by
Greg Burke, Equity Strategist
Greg is an Equity Strategist in the Investment Strategy team at Wilsons Advisory. He is the lead portfolio manager of the Wilsons Advisory Australian Equity Focus Portfolio and is responsible for the ongoing management of the Global Equity Opportunities List.
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