Macro Intelligence: why are the Australian "Big Four" banks being downgraded?

Article by Juliette Saly (ausbiz)

The "Big Four"

In this week’s edition of IG Macro Intelligence, we examine the prospects of Australia’s major banks, colloquially termed the "Big Four".

Healthy performance

The S&P/ASX 200 Financials Index (XFJ) has shown robust growth in early 2024, outpacing the broader ASX 200 Index and achieving a 16-year peak.

The XFJ has appreciated by 22% over the past year, significantly outstripping the ASX 200's 11% increase during the same timeframe. Year-to-date, it has risen by 8%, compared to a sub-1% increment in the wider market.

The XFJ encompasses the "Big Four" banks along with 24 other entities within the GICS Financials sector, including ZIP and insurer QBE.

The S&P/ASX 200 Financials Index (XFJ) chart

Buyer beware?

Analysts are starting to voice concerns about the recent surge in bank valuations, particularly the "Big Four": Westpac, NAB, ANZ, and Commonwealth Bank of Australia.

Macquarie has downgraded all four to "Underperform," adjusting their 12-month price targets downwards. Macquarie highlights that the banks are "trading at peak multiples without a clear fundamental reason," cautioning limited potential for future positive surprises.

This sentiment is echoed by others, with CBA, having recently attained record highs, now rated "Sell" by the majority of analysts. UBS remarked that "very optimistic assumptions are needed to justify the recent bank share price surges."

CBA's average broker target price is AUD$92.20, indicating a potential 21% downside. Citi is notably bearish with an AUD$82 price target and "Sell" rating, while Ord Minnett suggests maintaining holdings without additional buying at this level.

The consensus for ANZ, Westpac, and NAB leans towards "Hold." In contrast, smaller financial entities like ZIP receive a "Buy" average recommendation, highlighting a stark disparity in market outlooks.

"Big Four" mean estimate

Analyst ratings and future projections

Zip mean estimate

Charting the future

Despite Macquarie's downgrade, technical analysis suggests further growth potential for some banks, including CBA, which continues to set new records.

ASX TradeWatch indicators position CBA in a long-term upward trend, with rising 20 and 200-day moving averages, hinting at sustained bullish momentum.

Westpac also displays a robust bullish trend, with its short-term moving average surpassing longer-term averages, reinforcing the growth trajectory.

CBA daily chart

Westpac daily chart

Broker insights: divergent views on bank stocks' future

These trends gain some brokerage support, with Ord Minnett favoring Westpac with an "Accumulate" rating, and Jarden maintaining a positive outlook on the financial sector, foreseeing dividend improvements and fairer valuations.

Jarden rates NAB and Westpac as "Overweight," with ANZ at "Neutral" and CBA at "Underweight," suggesting a nuanced perspective on the sector's future performance over the coming year.

ASX sector timeframe: one year