Why does Macquarie think the big 4 ASX bank shares are 'on borrowed time'?

MotleyFool
05-02

ASX bank shares are having a scorcher on Friday, with the Commonwealth Bank of Australia (ASX: CBA) hitting another record high.

Let's review today's performance so far:

The Westpac Banking Corp (ASX: WBC) share price is $33.69, up 2.65%.

The ANZ Group Holdings Ltd (ASX: ANZ) share price is $30.38, up 2.15%.

The Bendigo and Adelaide Bank Ltd (ASX: BEN) share price is $11.46, up 1.73%.

The Macquarie Group Ltd (ASX: MQG) share price is $196.20, up 1.71%.

The National Australia Bank Ltd (ASX: NAB) share price is $36.52, up 1.43%.

The Commonwealth Bank share price is $168.63, up 0.83%. (In earlier trading, CBA shares hit a new record high of $169.27.)

The Bank of Queensland Ltd (ASX: BOQ) share price is $7.49, up 0.4%.

While today's outperformance is pleasing, there could be trouble ahead, according to top brokerage firm, Macquarie.

Big four ASX bank shares face medium-term risks, says broker

In a new note, Macquarie says the big four ASX bank shares have performed well but are "on borrowed time".

While near-term earnings for 1H FY25 are expected to hold up, the broker foresees a material shift ahead.

This will be driven primarily by an expected decline in interest rates and intensifying lending competition.

Inflation data for the March quarter released this week significantly increased the likelihood that the Reserve Bank will cut rates again.

The RBA's preferred measure of annual trimmed inflation fell from 3.3% in the December quarter to 2.9% in the March quarter.

This is the lowest trimmed inflation since the 2021 December quarter, but more importantly, it's inside the RBA's target band of 2% to 3%.

The RBA board next meets on 19-20 May.

Macquarie expects 100 basis points of interest rate cuts ahead, but notes that market pricing implies even more aggressive easing.

The broker says rate cuts will affect the big four banks' margins, with Westpac the "most exposed to RBA rate cuts".

Adding to this pressure is increasing residential mortgage and business lending competition.

Deposit competition, while manageable for now, is also expected to re-emerge, potentially squeezing spreads further, the broker says.

What about share prices?

Macquarie flags that CBA shares are particularly overvalued.

CBA shares are currently trading on a price-earnings ratio (P/E) of 28x compared to Westpac 17x, NAB 16x, and ANZ 14x.

Macquarie says:

While in the short term CBA appears defensive, earnings risks will emerge as interest rates and bond yields decline, and its valuation is extreme.

What's next?

Macquarie says the ASX bank shares have outperformed recently, partly because investors perceive them as safe-haven investments.

However, rate cuts, weaker consumer demand, and global volatility may lead to eroding profitability and shrinking returns on equity (ROE).

Macquarie says the big four ASX bank shares are "okay for now".

However, they may not fare as well amid structural and cyclical headwinds in FY26.

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