Are ANZ shares the best buy of the big four banks?

A solid start to the big four bank shares this week saw Commonwealth Bank close 0.98% higher, NAB shares add 1.01%, ANZ add 0.46%, and Westpac close 0.28% higher. Yet according to Morgan Stanley, ANZ shares may reflect the best opportunity of the four moving through the year, the sole Buy rating in the complex, amid mounting evidence that the nation’s 30-year housing boom is grinding to a halt.

Commonwealth Bank shares (ASX:CBA), long the market darling trading at a premium multiple, has emerged as the primary bear target in Morgan Stanley’s framework. The bank’s shares have already lagged the broader ASX 200 index over the past 12 months (down 11.44% against the ASX 200’s 3.29% gain) despite delivering strong results, suggesting markets are beginning to price in structural headwinds.

ANZ shares, by contrast, has been positioned as a relative safe haven within a challenged sector, benefiting from its lower valuation entry point and more diversified business mix, adding 20.7% over the past year. Westpac (+4.08%) and NAB (-3.73%) sit in the middle, carrying underweight ratings that reflect concerns about cyclical credit exposure without the compensating valuation buffer that makes ANZ attractive.

The sector-wide caution reflects a material shift in the investment thesis that has underpinned Australian bank multiples for three decades. Where housing credit growth and rising collateral values once provided a reliable earnings tailwind, Morgan Stanley now sees system mortgage growth slowing to approximately 3% in FY27, well below historical norms and insufficient to sustain current return profiles.

The Sector Look

Morgan Stanley’s bearish sector stance rests on the structural policy changes, deteriorating housing market dynamics, and rising credit risk.

The policy backdrop has shifted dramatically following the federal government’s June 2026 Budget agreement with the Greens. From July 2027, the capital gains tax discount on investment properties will be scrapped, and negative gearing will be banned on existing housing stock, permitted only for new builds. Simultaneously, new borrowing arrangements inside self-managed superannuation funds for residential property have been prohibited. These changes directly attack the tax-advantaged returns that have fuelled three decades of leveraged property investment, with Morgan Stanley explicitly linking them to the end of Australia’s housing super-cycle.

The impact is already visible in real-time market data. Auction clearance rates have collapsed to levels last seen during COVID-19 lockdowns, with some metropolitan markets recording clearance rates of just 30-35%. Investors are stepping aside, new development approvals are on hold, and vendors are revising price expectations downward. Some research houses now forecast national home prices will fall approximately 5% over 2026-27, a sharp reversal from earlier growth projections.

For the banks, this translates into a triple earnings squeeze. First, loan volume growth stalls as demand weakens and policy changes reduce the pool of willing buyers. Second, net interest margins face renewed pressure as competition intensifies for scarce new business. Morgan Stanley forecasts margins will rise through the second half of 2026 as previous rate hikes flow through back books, but then fall in the first half of 2027 as front-book discounts widen for the first time since 2022. Third, credit quality deteriorates as borrowers face sustained debt service pressure while collateral values stagnate or decline.

On impairments specifically, Morgan Stanley forecasts FY27 charges of approximately 12 basis points of total loans, or roughly 34 basis points of non-housing loans. While these figures remain well below crisis levels, they represent a material normalisation from the exceptionally benign post-COVID environment. The firm warns that underlying loss rates are likely to rise by year-end, with stress building first in small business, commercial, and consumer credit portfolios. The recent sharp de-rating of Judo Bank following credit quality concerns serves as a cautionary tale for the majors.

Why ANZ?

Within this challenging sector construct, Morgan Stanley’s preference for ANZ over its peers reflects several factors. The bank trades at a valuation discount to Commonwealth Bank and often to Westpac on price-to-earnings and price-to-tangible book value metrics. In an environment where the entire sector’s growth trajectory is being marked down, cheaper names with credible balance sheets and capital strength are preferred. ANZ also carries less exposure to the “housing quality premium” that has driven Commonwealth Bank’s multiple to record levels. If that premium compresses as the super-cycle thesis unravels, ANZ may outperform on a relative basis even if absolute earnings decline.

The bank has also positioned itself with optionality in areas where policy is shifting capital. With the government pushing towards build-to-rent, social housing, and infrastructure to rebalance the housing market, ANZ’s existing programs in social and affordable housing finance provide deployment opportunities that are less dependent on traditional owner-occupier mortgage growth. Ongoing cost-out initiatives, simplification programs, and technology migration offer bank-specific earnings drivers that can partially offset sector-wide headwinds.

Commonwealth Bank faces a premium valuation, justified by a dominant retail franchise, strongest brand recognition, and maximum leverage to a booming housing market. If the super-cycle is indeed ending and price growth turns flat or negative, the rationale for that premium evaporates. Morgan Stanley has placed the bank last in its pecking order, and market commentary increasingly frames Commonwealth Bank shares as the purest expression of a “short Australian housing premium” trade.

Westpac and NAB carry their own challenges. Both maintain sizeable business, SME, and consumer credit books that are sensitive to economic cycles. With GDP growth expected to remain modest at around 2.25% in 2026 and businesses facing higher rates alongside weaker demand, credit migration risks are skewed to the downside. Neither bank enjoys Commonwealth Bank’s franchise premium, but they also lack the specific value angle that makes ANZ compelling in Morgan Stanley’s framework.

The Reserve Bank of Australia’s stance adds another layer of complexity. The cash rate has returned to its previous peak following multiple hikes through 2026, and markets now see the tightening cycle near its end but not yet reversing. This means debt service pressure remains elevated while price momentum turns negative, a combination that typically leads to higher arrears among marginal borrowers and highly leveraged investors. Current RBA guidance and political tone do not point towards imminent aggressive easing that might re-ignite housing demand.

The timing of Morgan Stanley’s call is significant. FY26 results may still appear solid on the surface, supported by net interest margin expansion as previous rate hikes flow through loan books. The real test arrives in FY27, when slower loan growth, higher impairments, and renewed margin pressure from competition converge. Markets that extrapolate FY26 strength into perpetuity risk being caught wrong-footed when the earnings inflection materialises.