Australian Bank Shares Outlook for 2025

By Himanshi Akhand and Shivangi Lahiri

(Reuters) – The trajectory of the Australian central bank's interest rates and its impact on inflation will determine whether Australian bank shares can achieve growth in 2025, following a strong performance in the previous year that left their valuations stretched, according to analysts.

The financial sub-index, primarily made up of the largest lenders in Australia, has surged nearly 30% this year, marking its strongest yearly gain since 2009, significantly outpacing the S&P/ASX 200 benchmark index’s 8% gain.

This impressive performance in the banking sector has been driven by inflows from superannuation funds and retail investors, who are reassured by banks' ability to deliver high capital returns amid a weak economic landscape. Stable earnings and strong asset quality have further attracted funds to banks, while China's growth prospects have influenced commodity prices, leading to revaluation in the materials sector, according to several analysts.

Morgan Stanley analysts warned that the stretched valuations in the banking sector could result in a pullback if the inflows from key sources diminish. They noted that their portfolio positioning aligns with a potential shift away from Australian banks towards other sectors, including resources.

Commonwealth Bank of Australia (CBA), the nation’s largest lender, experienced a 39% increase in value, becoming the most valuable company on the local exchange. CBA last traded at A$155.12 per share, significantly above the average 12-month price target of A$104.37, with a forward price-to-earnings ratio of 27.55, according to LSEG data.

National Australia Bank (NAB) rose nearly 22%, Westpac increased by 42%, and ANZ reported an approximate gain of 11% this year.

The sustainability of this rally hinges on the Reserve Bank of Australia's (RBA) rate trajectory. The RBA has maintained interest rates at 4.35% for the past year but has indicated the possibility of easing rates as soon as February, provided economic data aligns with expectations.

Markets currently estimate around a 50% probability for a rate easing in February, with a quarter-point cut fully anticipated for April. Analysts at Citi noted that if inflation remains high and short-term rates remain unchanged, asset quality issues and reduced consumer spending could emerge. Conversely, if rates are lowered, investors might discover new opportunities across the ASX as other companies could benefit from potential inflation and rate relief.