ANZ Group Holdings (ANZ) currently represents the best value out of the four big banks, with many of the big banks currently trading at a premium, according to recent analysts’ reports by Morningstar.
In its analysis of the big four banks and Macquarie, Morningstar said valuations for bank shares such as the Commonwealth Bank (CBA) had become “frothy” and “decoupled from fundamentals”.
The research firm said many of the big banks were priced much more than the mid-single-digit earnings growth they were expected to generate.
The major banks ended the June quarter with a weighted average price estimate of 1.50, up from 1.27 at the end of March.
“The increase was entirely due to higher share prices, with fair values unchanged,” Morningstar said.
According to its analysis, ANZ is currently 6 per cent undervalued, National Australia Bank and Westpac are more than 15 per cent overvalued, while CBA is materially overvalued.
Morningstar has forecast an annual profit growth rate of around 5 per cent for the major banks on the basis of mid-single digit credit growth and modest improvements in margins.
While a reduction in cash rates in 2025 could accelerate growth as borrowing capacity increases, Morningstar warned this could also be offset by further margin pressure.
The research firm also noted that banks were nearing the end of on-market buybacks but still hold surplus capital which would support the outlook for modest dividend growth.
Although ANZ is at greatest risk of lowering its dividends, this risk is already reflected in its share price and 5.7 per cent yield, it said.
Credit growth for the banks is expected to be supported by public investment, population growth and solid house prices.
Morningstar expects credit growth to slow to between 4 and 5 per cent in 2026, however, based on the RBA’s low economic growth forecast.
Margins for major banks are at risk of softening in the short term as cash rates fall but are expected to improve modestly in the medium term, it said.
“Major banks appear to be pricing to hold market share, with Westpac the only one to lose market share, negatively affected by the closure of its broking business, Rams,” Morningstar said.
Macquarie’s market share gains have beaten Morningstar’s expectations, growing around three times faster than the market.
“Macquarie now has 6 per cent market share. We expect this to slow, given a likely internal need for higher returns,” it said.
“Macquarie’s operating cost savings have impressed and offset net interest margin pressure recently, but we expect this to become harder to achieve in the future.”
However, Morningstar still considers the bank to be “modestly overvalued”.
“Our fair value estimate for Macquarie is AUD 195 per share. Our fair value estimate implies a forward price/book ratio of two times, price/earnings of 19 times, and a forward dividend yield of around 3.5 per cent,” it said.
“Our fair value estimate is based on a discounted cash flow methodology, incorporating a 9 per cent cost of equity.”
Morningstar said growth in the global infrastructure and energy sectors presented an attractive opportunity for Macquarie to exploit.
The research firm expects infrastructure spending and renewable energy investment forecast to grow materially across Asia, North America and Europe over the next five years.
“We do not think a repeat of the last five years will reoccur, given much richer valuations. Investment managers will need to find places to deploy capital efficiently or risk burning customers and damaging their reputation.
“We believe Macquarie Infrastructure and Real Assets (MIRA) can retain its current management fees but believe performance fees will likely be lower in future as past gains were generally inflated by falling cash rates which pushed up asset prices.”
Macquarie’s investment banking operations are much more difficult to predict, said Morningstar.
Risk management, inventory management and trading tend to be more volatile depending on market conditions, although even in these lines, for some customers, the services are necessities,” it said
“We forecast modest growth over the next five years for the division, with confidence Macquarie can continue to add client base,” it said.
“Banking and financial services is expected to continue to achieve good growth, with home and business loans increasing to $195 billion by fiscal 2030.
“Macquarie is benefiting from its investment in its digital capabilities, and we believe this operating efficiency, coupled with consistent lending standards, is being rewarded in the mortgage broker channel.”
Morningstar’s fair estimate for Commonwealth Bank is currently at AU$98 per share.
It expects the bank’s loan growth to roughly align with the market over the medium term, assuming total lending growth averages 4.5 per cent over the next five years.
Net interest margins are expected to stabilise around 2.1 per cent by FY2025–26, reflecting “loan repricing, increased competition and higher wholesale funding costs”, it said.
“Banking fee income continues to decline, reflecting customer and public pressure on bank fees. We expect operating costs to be well contained, a combination of reduced headcount and ongoing investment in IT capability, seeing the cost/income ratio improve to around 42 per cent in fiscal 2029.”
Morningstar places its fair value estimate for National Australia Bank at AU$32 per share.
“Over the next five years, we expect moderate loan growth, net interest margins to gradually recover, good cost control and a relatively benign outlook for bad debts from fiscal 2023.
“We forecast return on equity averages 12 per cent, exceeding the 9 per cent cost of equity used in our discount cash flow.”
The research firm has similar expectations for Westpac, setting its fair value estimate for Westpac at AU$29 per share.
For ANZ, Morningstar expects the major bank will regain its momentum in the home loans market.
“We expect ANZ Bank to grow group loans at 4 per cent per year, similar to our expectation for the banking system.”
“We expect bad debt expense as a proportion of average gross loans to stabilise around 0.18 per cent from fiscal 2028, comfortably below the long-term average for ANZ Bank.”
Morningstar said relatively high exposures to institutional lending, including the mining and oil and gas sectors and Asia, posed significant risk to the research firm’s loan-loss assumptions.
“We assume a dividend payout ratio around 65 per cent,” it said.
“We expect cost efficiency to underpin profit growth, with the cost/income ratio falling from 51.6 per cent in fiscal 2024 to around 49 per cent by fiscal 2029.”
