Australia’s Big Four banks are “well positioned” to navigate a difficult operating environment in 2026 supported by their strong earnings ability, according to Morningstar.
In its analysis of the big four banks, the firm said it expects a neutral outlook in FY2026, with earnings remaining relatively stable. This outlook will be underpinned by solid loan growth, stable net interest margins (NIM) and low cost of risk (COR), though offset by higher operating costs.
Providing the backdrop for this outlook is Morningstar’s anticipation that the Australian economy will expand in the coming year, with GDP projected to grow 2.2 per cent in 2026. This expectation aligns with Ausbil’s outlook, though it forecasts stronger growth at 2.8 per cent.
The firm’s view is also underpinned by a supportive cash rate outlook, with the current rate at 3.6 per cent and the Reserve Bank of Australia (RBA) expected to take a data-dependent approach until underlying inflation is sustainably near the 2.5 per cent midpoint.
Morningstar also acknowledged some downside risks to this outlook, largely driven by external factors.
These risks included a potential sharp slowdown in China’s economy, rising trade tensions amid ongoing US tariffs, and a deterioration in US–China relations. Moreover, it noted that the path of interest rates may be more gradual given the recent uptick in inflation.
“We expect the banks’ NIMs will be supported by healthy loan growth, the repricing of deposits at lower rates, and the continued benefit from their structural hedge portfolios, although less than in FY2025,” Maria Rivas, senior vice president at Morningstar DBRS stated.
“Persisting downside risks are largely associated with an economic slowdown driven by external factors and the path of interest rate cuts may be more gradual given the recent uptick in inflation. Nonetheless, we consider the banks to be well positioned to navigate a potentially more difficult operating environment supported by their track record of solid earnings ability and strong capital”.
It added that it anticipates lending volumes to grow in the mid-single digit range while deposits continue at lower interest rates.
At the same time, the firm conceded NIM trends will largely depend on lending competition, especially as business lending gains renewed focus, with most banks signalling their intent to expand in this area.
Meanwhile, Morningstar said banks’ operating expenses are likely to keep rising, extending the upward trend of the past two years, partly driven by ongoing investment in IT and digitalisation.
It also said it expects mixed asset quality, with mortgage arrears improving and COR increasing modestly but remaining low.
“Overall, our FY2026 outlook considers that asset quality will remain sound despite some deterioration, with relatively low levels of Stage 3 loans that will continue to compare well with those of international peers,” the firm stated.
Moreover, despite declining interest rates, the firm said it expects deposit growth to continue into next year – albeit at a slower pace – while banks remain well capitalised.
