Shares in big four banks set to struggle after their strong run

They’ve starred on the share market in 2023-34, but shares in CBA, ANZ, NAB and Westpac look set for tougher times. Here’s why.

Shares in the major banks have climbed three times faster than the overall stock market so far this financial year, but the party appears to be petering out for their 2.5 million investors.

While the ASX 200 index is up 7.7 per cent for 2023-24, CBA and ANZ have climbed 21 per cent, NAB 29 per cent and Westpac 25 per cent, helped by high home prices and interest rates, benign bad debts and moderating mortgage competition.

However, analysts see few positives going forward, and they warn that the outlook is flat at best.

That won’t matter for many long-term shareholders who are happy to bank their dividends, currently yielding between 3.8 per cent (CBA) and 6.2 per cent (ANZ), with franking credits adding more for many. However, dividend yields have recently fallen back to the same level as term deposit rates for the first time in 18 years.

CBA has more than 860,000 shareholders, Westpac 599,000, NAB 585,000 and ANZ 435,000, although many investors own more than one bank stock.

Infinity Asset Management portfolio manager Dominic Mlcek said there were a few positive snippets in the banks’ recent reporting season, including declining competition in mortgages and signs of net interest margins stabilising.

“However, in our view there wasn’t enough to provide a catalyst for a further re-rate higher from here and we do question the lofty valuations and significant outperformance by the big four over the past 12 months,” he said.

“We’re not expecting a similar outcome moving forward.

“Regardless of whether the RBA commences rate cuts in 2024 or into 2025, we view this as a negative environment for the banks. Additionally, the banks have flagged that tech costs will likely drive operating expense growth back above inflation.”

Mr Mlcek said bank balance sheets remained in good shape and the current level of dividend payments should be maintained.

“However, given the lack of growth outlook in our view, we’re maintaining an underweight exposure towards the big four,” he said.

Schroders head of Australian equities Martin Conlon said he was cautious about the banks’ valuations and outlook.

“The volume growth does look to me to be anaemic at best and profits flat at best,” he said.

“We have very indebted consumers already. Getting them more indebted is tricky.

“Where do you go in Australia, given that you have got a lot of debt against residential property? It doesn’t seem healthy for the economy to shove more debt at that.”

Mr Conlon said it would be difficult for banks to generate high revenue growth.

“Unless you believe that they can take their nominal costs backwards, which very few companies have been able to do, then you end up saying it’s hard to come up with a picture that’s anything other than flat at best for bank profits,” he said.

The big four banks have benefited from low bad debts. Picture: NCA Newswire

Equity Trustees Asset Management Australian equities banks analyst Steve Coffey said banks had benefited from a benign bad debt environment that had boosted their earnings and supported their share prices.

Mr Coffey said higher-for-longer interest rates could support bank revenues in the short term, and looming tax cuts and budget subsidies were another positive, but the fundamentals were less positive over the medium term.

“Profit growth is relatively flat, valuations are expensive, and returns have been structurally reducing over time, making the banks a less attractive investment,” he said.

“The Australian banks now rerated significantly relative to offshore peers, despite their return on equity falling over the last 10 years.”

Originally published as Shares in big four banks set to struggle after their strong run