Australian Banks Set for Strong FY25 Finish, But FY26 Headwinds Loom

Australia’s major banks are heading into the November earnings season with solid momentum and high expectations. The market anticipates strong full-year results, supported by resilient credit growth, disciplined deposit pricing, and strong Treasury and Markets income through the second half of FY25. Yet, analysts warn that this may mark the top of the cycle, with FY26 guidance likely to highlight moderating revenue trends and renewed margin pressure as rate cuts filter through the system.

Revenue Momentum Still Intact

Across the majors, lending growth has held firm through 2H25, particularly in business and institutional segments. Westpac and NAB are expected to lead in top-line performance, helped by a favourable lending mix and deposit discipline. Consumer credit growth has also surprised on the upside, with a pickup in housing demand offsetting softness in refinancing activity.

Macquarie is again likely to post another solid half on the back of active markets and strong client trading volumes, while regional players such as Bendigo & Adelaide Bank are expected to show steady growth, albeit off a smaller base. Overall, the sector enters results season with one of the healthiest revenue environments in years; a sharp contrast to the cautious sentiment that dominated 2024.

Margins Hold Up (For Now)

Net interest margins (NIMs) are expected to be stable to slightly higher in FY25, supported by ongoing deposit repricing, strong NZ operations, and a favourable mix shift toward higher-yielding business loans. Westpac and NAB appear best placed to deliver positive NIM outcomes for the second half, following upbeat quarterly updates earlier in the year.

However, margin resilience is unlikely to last. Analysts widely expect FY26 to bring renewed pressure from lower cash rates, tighter deposit spreads, and the gradual fade of replicating portfolio benefits. Competitive tension in business lending is intensifying, with smaller lenders also chasing market share. While a few forecasters note potential tailwinds from reduced offshore funding costs and narrowing basis risk, the broader consensus is for modest NIM contraction over the next 12 months.

Costs and Productivity Take Centre Stage

Expense control has become the main battleground heading into FY26. This season’s results will capture a mix of restructuring charges, wage inflation, and technology investment across the majors. Both Westpac and ANZ have pre-announced notable one-offs tied to transformation programs and remediation.

The focus will now shift to the credibility of upcoming cost-reduction targets. ANZ’s new leadership is viewed as the most aggressive, planning a structural reset that includes several thousand role reductions. Westpac’s “Project UNITE” is another key initiative under scrutiny, aimed at simplifying operations and improving efficiency following years of underperformance. Success in these productivity programs could become a major differentiator for valuations through FY26.

Credit Quality Remains a Pillar of Strength

Despite macro uncertainty, asset quality remains in strong shape. Loan losses are low, arrears are stable, and collateral performance continues to exceed model assumptions. Many banks still hold excess provisioning buffers built up post-pandemic, giving them flexibility to absorb any mild uptick in delinquencies.

Consensus expects a modest rise in impairment charges into FY26, but from historically low levels. Provision releases are likely to feature again in FY25 results, particularly for banks with above-system credit growth. The key debate is whether these buffers can remain untouched as lending expands or if “mean reversion” in bad debts starts to emerge through 2026.

Capital Management

Balance sheets remain sound, though few expect major capital returns this time around. Westpac’s remaining buyback is a focal point, but several brokers suggest it could be deferred to preserve flexibility amid regulatory changes and balance sheet growth. CET1 ratios are projected to remain comfortably above minimum requirements, with NAB and CBA in the strongest relative positions.

Dividend growth is expected to be modest, in line with earnings, while special distributions appear unlikely. The market’s preference has shifted toward organic growth and funding resilience rather than capital release.

Valuation Stretch

Australian banks continue to trade on elevated multiples (around 19–22x forward earnings) well above historical averages. The premium reflects strong earnings delivery, stable dividends, and the sector’s perceived defensive appeal amid global volatility.

Still, stretched valuations leave limited room for disappointment. Many institutional investors have rotated toward self-help stories such as ANZ and Westpac, where cost-out potential remains a key driver of upside. NAB retains favour among those seeking operational consistency, while CBA’s premium multiple keeps it vulnerable to even small earnings misses.

Outlook

This reporting season is shaping up as a strong finish to FY25, but perhaps the cyclical high point for bank earnings. The combination of easing rates, margin compression, and rising competition is likely to cap growth through FY26. That said, resilient credit trends, disciplined cost management, and stable asset quality should provide a solid earnings floor.

While valuations appear rich, the sector’s income reliability and defensive characteristics continue to make it a preferred holding for investors navigating softer global growth and market volatility. The coming weeks will reveal whether the majors can deliver enough to justify their premium pricing or if the long-anticipated margin squeeze finally begins to bite.

 Key Dates and What to Watch

 1 year ASX financials sector total return 

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.