However, Morningstar equity analyst Nathan Zaia said banks could find ways to offset these impacts.
โIf the banks pass on all reductions to home loans, third-term deposits and online savings accounts, then margins would probably be softened a little,โ Zaia said. โBut there are levers they can pull to offset the direct impact you would expect.
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โThere are many moving parts โ sure [if there is a rate cut], then margins come down, but banks are pricing both sides of the balance sheet to make decent margins, so theyโll respond accordingly,โ he said.
The likely pressure on margins comes amid ongoing debate about whether Australian banks are overvalued. Although year-on-year profits for the big four banks were down 5.7 per cent in 2024 due to margin pressures and increased costs, shares in Westpac surged 42 per cent, while Commonwealth Bank (up 39 per cent), NAB (up 26 per cent), and ANZ (up 20 per cent) similarly reached new heights.
Morgan Stanley said the banksโ outperformance was thanks to their haven status within the market, as investors shifted from the struggling materials sector and funnelled money into banks. This led to CBA overtaking mining giant BHP to become the biggest company on the Australian sharemarket in July.
A report by the investment bank said: โThe major banks are expensive and current share prices are hard to justify based on their growth and return profilesโ, which increases the risk of banks underperforming on the sharemarket this year.
Another factor inflating bank performances is major superannuation funds overcrowding the sector, with their stake in banks now almost 30 per cent, up 2 per cent from September 2023. This prompted the Reserve Bank to note that super fundsโ investment decisions โhave the potential to amplify shocksโ in the financial system.
Richard Wiles, head of research at Morgan Stanley, said a combination of factors had โdriven more money into superannuationโ, and in turn, the banking sector.
โWeโve had strong population growth, a strong labour market, and last year we had an increase in the superannuation guarantee rate from 11 to 11.5 per cent,โ he said.
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