Australia’s Big Four Banks Start May Slow, as Eyes Turn To RBA Decision

Australia’s major banks opened May under pressure, with ANZ shares leading losses down 2.84% following a strong interim result that failed to sustain momentum, while Commonwealth Bank, Westpac and National Australia Bank edged lower as markets repositioned ahead of the Reserve Bank’s pivotal May meeting.

The banking sector’s pullback represented a clear shift in sentiment after a solid start to 2026. In the first trading session of May, Commonwealth Bank shares slipped 0.36%, Westpac declined 0.13%, and NAB fell 0.13%, while ANZ’s 2.84% drop stood out as the session’s sharpest move among the quartet.

ANZ’s amplified move followed the release of half-year results that, while strong on headline metrics, triggered a classic “sell the news” response from markets that had already priced in much of the turnaround story.

The other three majors faced a more general valuation reassessment, particularly Commonwealth Bank, whose price-to-earnings ratio of approximately 28 times has increasingly drawn scrutiny as it trades at roughly a 50% premium to its domestic peers and more than double the global banking sector average of around 11 times.

The Valuation Question Continues

ANZ’s interim result provided the clearest fundamental catalyst for the session’s moves. The bank reported cash profit surging to approximately A$3.78 billion, underpinned by aggressive cost management that drove the cost-to-income ratio down to around 49-50%, a sharp improvement from prior periods. Return on equity climbed from the 6-7% range to approximately 10-11%, marking a tangible operational turnaround under Chief Executive Nuno Matos’s “reset then outperform” strategy. The result validated management’s heavy investment in technology and restructuring, though it also highlighted the execution risk embedded in the ongoing Suncorp Bank integration and legacy system decommissioning planned through 2026-2028.

Despite the strong numbers, ANZ’s valuation at a trailing PE of approximately 18.26 times earnings, roughly in line with Westpac at 19.29 times and NAB in the high teens, leaves the stock trading above global banking peers while still discounted to Commonwealth Bank’s stretched multiple. Earnings growth forecasts cluster around 9-10% annually, with revenue expansion of 4-5% per annum, suggesting the current valuation already captures much of the near-term upside from operational improvements.

Across the sector, net interest margin dynamics remain the critical swing factor. After years of compression driven by mortgage discounting, intense deposit competition, and the unwinding of cheap pandemic-era central bank funding, margins have stabilised in 2025 and shown modest improvement into 2026, according to sector analysis. KPMG’s review of the FY25 reporting season noted that combined profits for the major banks were essentially flat at approximately A$29.8 billion, down 0.5% year-on-year, with margins “likely to remain under pressure” despite the recent stabilisation.

In The Shadow of Monetary Policy

The upcoming RBA meeting looms large over the sector’s near-term trajectory.

Research desks across the major banks and independent forecasters have converged on expectations for a further 25 basis point rate increase in May, taking the cash rate to approximately 4.35-4.40%. More significantly for bank earnings, the consensus view has shifted away from earlier forecasts of multiple 2026 rate cuts toward a scenario of only one or two modest reductions by year-end, leaving rates structurally higher than the pre-pandemic era.

This higher-for-longer backdrop presents a double-edged proposition for the banks as on one hand elevated cash rates support net interest margins and provide a buffer for earnings, particularly if credit quality remains resilient. Recent trading sessions following RBA decisions have seen the banking sector rally as markets priced in the ability to pass rate increases through to borrowers. On the other hand, prolonged high rates increase the risk of rising arrears among leveraged households and small business borrowers, which would eventually translate into higher loan-loss provisions and challenge the benign credit outlook currently embedded in valuations.

APRA’s 2026 loss-absorbing capacity rules, which push required total capital above 18% of risk-weighted assets, add a structural headwind by lifting funding and capital costs across the sector. This regulatory tightening caps how much of any rate benefit can flow through to shareholder returns, constraining return on equity potential even as headline margins stabilise.

Why The Valuation Gap, and Will It Hold

Commonwealth Bank’s premium valuation has emerged as a focal point for debate about the sector’s sustainability at current levels. While the bank’s franchise strength, digital leadership and perceived superior risk management justify some premium, the magnitude of the gap has raised questions about whether a mid-to-high twenties multiple can be sustained when sector profit growth is essentially flat and long-term capital growth expectations cluster around high-single-digit total returns including dividends.

Recent sector commentary has rated Commonwealth Bank highest on franchise quality and earnings consistency but explicitly flagged “limited valuation upside” from current levels. The bank has led multiple rallies this year, often outpacing peers by substantial margins in single sessions, driven by its position as the perceived “bond proxy” within ASX financials, as in a defensive, high-dividend play for yield-focused portfolios. Yet this very popularity creates crowding risk, making the stock vulnerable to de-rating if RBA expectations shift materially toward earlier cuts or if any idiosyncratic issue emerges.

Westpac and NAB, by contrast, are increasingly positioned by analysts as the value and operating leverage plays within the group. Trading at high-teens multiples with solid business and SME exposure, both banks offer reasonable starting valuations combined with potential for margin and cost improvement as digital and efficiency programs mature. Westpac faces ongoing scrutiny over regional branch closures, with recent reports highlighting pressure for a A$153 million package to support in-person banking in rural areas, though the dollar impact relative to group profit of over A$7 billion annually appears limited.

The banking sector’s pause at the start of May appears more a function of positioning and valuation reassessment than fundamental deterioration. Markets are de-risking ahead of the RBA meeting, where any signal that the May hike could mark the peak of the cycle would challenge both the rich Commonwealth Bank multiple and the sector’s margin-driven bull case.

For ANZ specifically, the post-earnings sell-off reflects the unwinding of a crowded turnaround trade after strong numbers validated the thesis. The bank’s operational metrics have clearly improved, but with the stock already trading at a premium to global banks and the Suncorp integration carrying both upside and considerable execution risk, markets appear inclined to take profits rather than chase further gains at current levels.

What Next

The broader sector faces a structural tension between quality and price. Capital strength remains robust, with CET1 ratios comfortably above regulatory minima supporting ongoing high, often fully-franked dividends that underpin the investment case for income-focused portfolios. Digital investment and cost-reduction programs offer genuine operating leverage, particularly for ANZ and Westpac as they work to close the gap with Commonwealth Bank’s technology lead.

The coming weeks could well prove critical as the RBA’s May decision and forward guidance clarify the rate trajectory, while Westpac’s imminent first-half results provide the next major data point for sector earnings momentum. Markets appear to be taking a cautious stance, locking in gains from a strong year-to-date run while awaiting confirmation that the margin stabilisation and benign credit outlook can persist in a maturing cycle. The modest pullback suggests a sector at an inflection point, still structurally sound and dividend-rich, but increasingly vulnerable to any shift in the macro or policy backdrop that challenges the status quo.