Major banks lag behind ASX 200 in August

Major banks underperformed the ASX 200 in August after posting resilient earnings earlier in the reporting season. The sector has struggled to maintain its momentum against the broader market as higher interest rates and slowing housing momentum create headwinds.

Performance Shifts in August

Commonwealth Bank of Australia (CBA), National Australia Bank (NAB), Westpac and ANZ had outperformed the ASX 200 by more than 5 per cent in July. The following month, however, the majors flipped dramatically to underperform the broader index. Their average total shareholder return was -6 per cent over August, while the ASX 200 returned 1.5 per cent over the same period.

Equity analysts Richard Wiles and Sally Hong noted that the major banks’ price-to-earnings multiple fell by 1.4 points to about 18.3x during the month. CBA led the decline at -2.5x, while ANZ was broadly flat. Excluding the country’s biggest bank, the group’s P/E multiple fell by -0.9 points to 15.6x.

The banks’ average price-to-book ratio dropped slightly to around 2.1x over August, while their expected dividend yield for the next year rose to about 4.2 per cent. Major bank shares are now valued about 8 per cent cheaper, on a P/E basis, than industrial companies outside banking.

Weakness in Housing Demand

While the banks had delivered a strong reporting season just a few weeks prior, the period also exposed a common challenge facing the sector as mortgage demand softens and competition for borrowers intensifies. Sharesies head of capital markets Jacki Neumann said loan application data pointed to a broad-based slowdown in borrowing activity.

“Mortgage applications fell by around 10-20 per cent over the past quarter across all four major banks,” she said. “The results suggest higher interest rates continue to weigh on borrowing activity, while changing tax settings appear to be weighing on investor sentiment. For banks, a smaller pool of borrowers is heightening competition for quality lending.”

Since the Federal Budget in May, the banks have confirmed a fall of more than 20 per cent in investor applications for housing finance. The move to curtail access to negative gearing and return to the taxation of real capital gains with a minimum tax rate of 30 per cent is driving a big decline in investor demand for residential property in the near term because it means a significantly lower after-tax return for investors, AMP chief economist Shane Oliver wrote.

Oliver expects a top-to-bottom fall of 10 per cent overall, with prices not bottoming out until around the June quarter next year. A modest recovery should begin in 2027-28 as the RBA starts to shift to rate cuts.

The economist continues to expect one more rate hike by year end, a trend which has traditionally been associated with some softening in property prices or slower growth. With tax and rate hikes combining, Australia’s home price downturn is underway, deepening in August to have a top to bottom fall in prices of 3.6 per cent.