Morgan Stanley Highlights Risks for Major Australian Banks' Earnings

Overview#

Morgan Stanley has raised concerns about the potential for earnings downgrades among Australia’s major banks due to increasing economic uncertainty. The investment bank suggests that earnings could be reduced by an average of 7-11% for the fiscal year 2027.

Scenarios for Earnings Impact#

While Morgan Stanley has not altered its current forecasts, it has analyzed two potential economic slowdown scenarios. These scenarios predict slower loan growth and higher impairment charges, which are losses banks might incur when borrowers fail to repay loans, returning to levels seen before the COVID-19 pandemic.

In these scenarios, the National Australia Bank (ASX:NAB) could see the largest earnings downgrade, ranging from 9.5% to 14.5%. The Commonwealth Bank of Australia (ASX:CBA) follows with a potential downgrade of 6-9%, while Australia and New Zealand Banking Group (ASX:ANZ) and Westpac Banking Corporation (ASX:WBC) could face downgrades of 5.5-10% and 5.5-9.5%, respectively.

Current Banking Conditions#

Despite a recent period of stronger loan growth, improved profit margins, and low loan losses, Morgan Stanley warns that recent developments could significantly alter the operating environment for these banks. The uncertain economic climate raises the risk of both earnings downgrades and a potential decline in the banks' market ratings, which could lead to underperformance compared to the ASX200 index in 2026.

Future Outlook#

If the economic outlook worsens, Morgan Stanley's analysis indicates that CBA's share price may be more resilient, while NAB could be the most vulnerable to these slowdown scenarios. The firm currently anticipates an average loss rate of 10 basis points on total loans for fiscal year 2027, which translates to 0.10% of the total loan amount.

In its bear case scenario, Morgan Stanley estimates that valuations could be about 32% lower than current prices, factoring in modest loan growth and a slight decline in profit margins. This scenario suggests earnings downgrades of 12-17% compared to the base case, with a return on equity ranging from 8.5% to 12.5%.