Citi sounds warning on bank values, amid concern over outlook for 2025

Investors have piled into bank shares, driving the sector higher, despite troubles and concerns over the economy. But there are hurdles ahead.

Australia’s banking sector faces a difficult 2025. Picture: NCA Newswire

Australia’s banking sector faces a tough 2025, with analysts warning valuations are stretched and earnings growth likely to be muted to modest, heavily weighted to interest rate movements.

In a flurry of notes to investors, investment banks have weighed in, cautioning the big ASX-listed banks could face falls of up to 30 per cent in the year ahead.

But market watchers noted the gloomy forecasts come on the back of nearly a year in which predictions for bank share prices and their actual value have grown increasingly separate.

In a note, Citi banks analyst Brendan Sproules warned the banks should expect “very modest growth” in 2025, warning the stellar market rally in the sector this year was unlikely to be repeated.

Commonwealth Bank shares have surged over the year, lifting 50.5 per cent over 12 months to close on Monday at $158.21.

In a note, Mr Sproules warned the sector should see nearly 30 per cent falls in share prices across the Big 4 in the year ahead.

Mr Sproules warns CBA shares could fall up to 39 per cent under Citi’s forecasts, with a forecast the bank will slump to $91.50.

Mr Sproules said the 40 per cent rise in listed banks this year came despite “a lack of fundamental earnings and dividend growth”, noting shares have soared as investors piled into their shares in a bid to find a safe place to hide from inflation.

“The banks have benefited from inflation-led loan growth, given the strong employment income growth and under-geared balance sheets,” he said.

But Mr Sproules said many investors would face a challenge in the year ahead, warning the banks do not offer “a sustainable earnings and dividend growth story”.

The Citi analyst said banks would instead face inflation impacts on costs, which are expected to outstrip revenue growth.

In addition, banks will also see higher deposit and funding costs, “with only very modest growth expected in 2025”.

Mr Sproules said banks were “intricately linked” to the inflation story next year and “the direction of short-term rates”

“If inflation stays elevated and short-term rates on hold, asset quality issues driven by rate affordability and slowing consumer spending may rise,” he said.

“If inflation is defeated and rates are cut, the performance of the banks is expected to be less relative to other opportunities across the ASX as other companies may benefit from this inflation and rate relief.”

Investor lending has outstripped owner-occupier borrowing for the first time since 2016. Picture: David Crosling/NewsWire

UBS banks analyst John Storey said the banking sector would retain its “predictable and stable” reputations into the year ahead, “especially as this relates to capital return”.

Mr Storey said Westpac was best positioned for a “cost-out” benefit from its Project Unite technology program, which may support returns for investors.

However, UBS warned the banking sector valuations cannot “continue to be disconnected from underlying profitability indefinitely”.

Mr Storey recently upgraded his forecasts for the sector, noting the banks were likely to see a 0.5 per cent lift in earnings in the year ahead, rising to 0.6 per cent in 2026.

“We remain cautious on the regional banks given their structural operating disadvantages in the current period,” he said.

But Macquarie analysts note credit growth has remained strong for Australia’s banks, with a survey of lending finding investor borrowing has now outstripped owner occupiers for the first time since 2016.

Macquarie found home lending has accelerated to 6 per cent growth over the year, while business lending has lifted to almost 10 per cent.

Macquarie finds CBA is outstripping its rival major lenders, to grow its home book above others in the system, while Westpac is lagging, in part due to the run-off of its RAMS business.

NSW is leading the states for investor activity, with Macquarie finding Victoria has proven the least popular place for investors to borrow and buy.

NAB business credit growth has remained below its rivals, with other banks outstripping the major.

Bank of Queensland is shrinking its mortgage book, but Macquarie notes the lender’s pivot into business borrowing “has not stepped up enough to offset this”.

Macquarie also finds refinancing activity of existing loans has moderated.