Australia’s largest banks are confronting a noticeably tougher operating environment as prospects for mortgage growth cool, provisions for souring loans rise and borrowing costs climb. What until recently were investor favourites - prized for dependable dividends and exposure to a buoyant housing market - now face renewed scrutiny from shareholders and analysts.
Equity moves have been pronounced. Since late February, National Australia Bank shares have fallen about 23%, Westpac is down nearly 14.5%, ANZ has slipped 11.2% and Commonwealth Bank has eased 5.6%. Those moves make the four major Australian banks the weakest performing banking stocks in Asia over that period, reflecting a broader re-rating of expectations for the sector.
Several forces are converging. The Iran war has raised concerns about oil supply and economic growth, contributing to the initial weakening in bank shares. That downturn intensified this month following federal government proposals to change property-related tax concessions for investors - measures analysts expect will slow housing demand and mortgage lending. At the same time, the Reserve Bank of Australia raised interest rates for the third time this year in May, driving borrowing costs back to levels not seen since the pandemic-related low.
“Aside from COVID, we cannot recall a time in the past 25 years when the operating conditions for banks have shifted so quickly,” Morgan Stanley’s Australian banking analyst Richard Wiles said. He pointed to the combination of RBA rate rises, the proposed tax changes in the federal budget and the potential direct and indirect impacts of the global energy shock as factors increasing uncertainty for Australian lenders.
Analysts say the likely pullback in housing activity will feed through to loan growth and bank margins. Morgan Stanley’s forecast envisages Australian home prices falling between 5% and 10% - a peak-to-trough decline that would be the largest in around forty years - and projects mortgage growth slowing to roughly 3% to 4% next year, down from current growth of about 7.5%.
The mortgage market in Australia is large and central to the business models of the four major lenders. Mortgages represent roughly 60% of the combined credit portfolios of the Big Four, according to regulatory data, and the A$2.4 trillion mortgage market - valued at about $1.7 trillion - is a dominant driver of revenue after the lenders scaled back their positions in wealth management, financial advice and some offshore assets. By comparison, analysts note mortgage exposure among global peers typically ranges between 40% and 50% of loan books.
Commonwealth Bank is the market leader in home lending with a 25% share, followed by Westpac, NAB and ANZ, their recent filings show. When contacted about the implications of a mortgage slowdown, all four banks declined to comment.
The sector has already taken some precautionary steps. Collectively, the major banks set aside A$955 million in loan-loss provisions, attributing part of that build to the indirect costs of the Iran war. That move, combined with the potential for tighter lending standards under the new tax settings, has sharpened attention on the banks’ limited revenue diversification relative to international rivals.
“This puts an over-reliance on domestic housing for Aussie banks,” K2 Asset Management Managing Director George Boubouras said, noting that global competitors often generate more diversified revenue from investment banking, research and equities trading. He added that the tax changes would likely tighten lending criteria and increase capital costs.
With mortgage growth expected to moderate, competition on price is likely to be muted. Lenders are therefore anticipated to focus on cost reduction to protect margins as credit demand ebbs. Andrew Martin, co-chief executive at fund manager Alphinity, said banks have learned that aggressive price competition is a zero-sum game domestically and suggested cost control will be a clearer priority.
Macquarie analysts have already trimmed earnings per share forecasts for the sector - by up to 2% for 2027 and between 2% and 4% for 2028 - and reduced target price recommendations by as much as 4%. In response to slowing revenue prospects, some banks have started to cut jobs, offshore functions and implement technology changes. Analysts expect those actions - along with system simplification and greater automation - to accelerate if revenue growth remains subdued.
Foreign investor appetite has offered some support in recent years. Overseas ownership of Australia’s major banks has ticked higher over the past two years, with offshore investors now holding roughly between a quarter and a third of shares - a demand dynamic that helped make Commonwealth Bank the world’s most valuable lender last year.
Despite that support, several investors and fund managers express caution. Andy Forster, senior investment officer at Argo Investments, said the banks still appear expensive on valuation grounds and that while dividends are likely defendable, they are not expected to grow. “Dividends probably can be protected, but there’s a little bit of risk there ... definitely don’t feel like they’re going to grow,” he said.
The combination of a potential pullback in mortgage volumes, higher provisioning, elevated funding and capital costs and the fallout from geopolitical risks has shifted the sector’s outlook. That shift is prompting banks to accelerate efficiency measures and for investors to reassess expectations for earnings growth and dividend trajectories.
What this means for markets and sectors
- Bank equities in Australia have become less attractive as investors price in lower mortgage growth and margin pressure.
- Residential property and mortgage-related sectors face weakening demand driven by tax changes and expected price declines.
- Domestic financial services that rely heavily on mortgage income - rather than diversified investment banking or trading revenues - are most exposed to the slowdown.