By Scott Murdoch and Christine Chen
SYDNEY, May 27 (Reuters) - A looming slowdown in mortgage lending, higher provisions for souring loans and rising interest rates are darkening the outlook for Australian banks, pushing investors away from their once-favoured stocks.
The Australian banking sector outperformed the broader market in 2025 by roughly double, preferred by investors for reliable dividends and benefiting from record property prices and resilient credit quality.
Their shares have been under
pressure since the beginning of the Iran war, as oil supply risks raised concerns about economic growth, and the selloff gathered momentum this month on changes in housing tax rules.
Since late February, National Australia Bank is down 23%, Westpac is off nearly 14.5%, ANZ has lost 11.2% and Commonwealth Bank has dipped 5.6% - making them the worst-performing banking stocks in Asia.
The selloff highlights a turning of the cycle for the big Australian banks, as the prospect of a further slowdown in the A$2.4 trillion ($1.7 trillion) mortgage market looms.
The growth challenges in the mortgage market come on top of monetary policy headwinds with the central bank lifting rates for a third time this year in May, returning borrowing costs to post-pandemic highs.
"Aside from COVID, we cannot recall a time in the past 25 years when the operating conditions for banks have shifted so quickly," Morgan Stanley's Australian banking analyst Richard Wiles said.
"Three RBA rate hikes, proposed changes to property-related tax concessions in the federal budget, and the potential direct and indirect effects of the global energy shock have created a far more uncertain outlook for the Australian banks."
The changes to property-related tax concessions aimed at property investors unveiled earlier this month are expected to slow mortgage lending and weaken demand for home loans, and banks' margins, analysts say.
Australian home prices could fall between 5% and 10%, the sector's largest decline in four decades, according to a Morgan Stanley forecast, pushing mortgage growth to around 3%-4% next year down from 7.5% now.
LACK OF DIVERSIFIED REVENUE STREAMS
The potential hit to the mortgage business follows the top Australian banks setting aside A$955 million in total in loan-loss provisions, blaming the indirect cost of the Iran war.
Mortgages account for around 60% of the "Big Four" Australian lenders' combined credit books, according to regulatory data, and have become increasingly central to earnings as the lenders retreat from wealth management, financial advice and offshore assets. Australian banks are more exposed to housing than their global peers, where mortgages comprise 40%-50% of loans, according to analysts.
CBA is the market leader in home lending, with a 25% market share, followed by Westpac, NAB, and ANZ, their latest financial filings showed. When contacted, all four banks declined to comment about the impact of a mortgage slowdown.
K2 Asset Management Managing Director George Boubouras said the growing challenges expose a lack of diversified revenue streams at Australian lenders compared to their global peers in areas such as investment banking, research and equities trading.
In the U.S., each of the major banks' share prices have recovered from the late February selloff triggered by the war.
"This puts an over-reliance on domestic housing for Aussie banks," he said, adding that the changes to property-related tax concessions would tighten lending standards and increase capital costs.
'ZERO-SUM GAME'
With mortgage growth moderating, banks have limited appetite to compete aggressively on price. Instead, lenders are expected to focus more heavily on cutting costs to maintain margins as credit demand weakens.
"It is a bit of a zero-sum game in Australia if you try to win with price, and they've all learnt the hard way," said Andrew Martin, co-chief executive of fund manager Alphinity, which owns shares in the four major banks.
Macquarie analysts have downgraded earnings per share forecasts for the banking sector by up to 2% in 2027, and between 2% and 4% in 2028. They also cut the banks' target price recommendations by up to 4%.
Some of the Australian banks have begun job cuts, offshoring and technology changes, moves analysts say are likely to gather pace if revenue growth remains weak. They are also simplifying systems and increasing automation to reduce operating costs.
Foreign ownership of Australia's major banks edged higher over the past two years, with offshore investors now holding roughly a quarter to a third of shares. That foreign demand made CBA the world's most valuable lender last year.
"We're cautious on the outlook. They still look pretty full from a valuation perspective," said Andy Forster, senior investment officer at Argo Investments, which owns shares in the four banks.
"Dividends probably can be protected, but there's a little bit of risk there ... definitely don't feel like they're going to grow."
($1 = 1.3968 Australian dollars)
(Reporting by Scott Murdoch and Christine Chen in Sydney; Additional reporting by Rajasik Mukherjee and Sameer Manekar; Editing by Sumeet Chatterjee and Jacqueline Wong)
