CBA is relentless. But fighting the momentum requires perfect timing

Australian bank stocks are defying analyst expectations, continuing their strong performance even as interest rates fall and most brokers maintain a negative view of the sector.

Despite 53% of major bank stock recommendations being sell ratings, the banking sector has outperformed broader markets through 2025, recovering from a sharp February sell-off following disappointing earnings results, largely driven by weaker-than-expected net interest margins. The rally has surprised analysts who expected rate cuts to weigh heavily on bank profitability.

Historical Patterns Provide Context

According to Citi, this phenomenon isn't unprecedented. During previous rate-cutting cycles, banks have often provided relative stability when other sectors face faster earnings deterioration. The 2011-2012 period stands out as a similar example, when banks outperformed despite multiple rate cuts as the resources boom ended and commodity prices declined.

S&P/ASX 200 Financials Index (blue) vs. S&P/ASX 200 Materials Index (red) | Source: TradingView

"In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could," the analysts noted, citing economist Rudi Dornbusch's famous observation about market timing.

Banks Buy Time Through Deposit Repricing

A key factor supporting near-term performance has been banks' aggressive management of deposit costs. Following two 25 bp rate cuts (Feb and May 2025), major banks have repriced term deposits down by approximately 65 bp on average.

More significantly, savings account rates have been selectively lowered by 25 bps through cuts to base rates. Westpac notably reduced its base savings rate to 40 bps while increasing its bonus rate, effectively reducing its total funding cost by around 40 bps despite the modest headline reduction.

This proactive deposit repricing has helped stabilise net interest margins in the short term, even as mortgage rates remain difficult to adjust due to political considerations and competitive pressures in business lending.

Provision Buffers Offer Additional Support

Banks are also benefiting from their substantial collective provision buffers built up during the pandemic. As economic scenarios play out, these provisions can be "released", meaning the bank has lowered the amount of money it had set aside for potential loan losses. This typically happens when a bank believes the risk of loan defaults has decreased or when it wants to free up capital for other purposes such as boosting lending or growth.

NAB, for example, reported collective provisions were 1.42% of its credit risk-weighted assets compared to 0.96% in late 2019, indicating that its provisions are significantly higher now than pre-Covid levels and significant capacity for further releases.

Valuation Concerns Persist

Despite the operational tailwinds, analysts remain cautious about stretched valuations. Some major banks are trading at over 30 times earnings with minimal growth prospects, creating what analysts describe as a "positive carry on short positions."

The combination of high valuations and expected earnings headwinds from rate cuts and economic softening is expected to create challenges, particularly from FY2026 onwards.

Investment Outlook

Citi maintains its generally bearish stance on the sector, preferring ANZ due to valuation support, followed by Westpac, Commonwealth Bank, and NAB. Though all four are "Sell" rated.

The analysts warn that while banks may continue to find relative support in the near term due to earnings stability, "rotations could play out quickly when they do." The key risk for investors betting against banks is that the crowded trade may persist longer than expected as economic uncertainty drives demand for perceived stability.

Credit growth remains robust for now, but forward indicators suggest softening ahead as the cumulative impact of rate cuts builds through 2025 and into next year.

The Bottom Line

While Citi's argument and rationale make sense, it's hard to argue against price action – which is ultimately what pays investors.

Commonwealth Bank continues its relentless climb, trading above $190 for the first time on record Wednesday.

Commonwealth Bank year-to-date price chart (Source: TradingView)

The stock has gained 24% year-to-date and 48% over the past twelve months, yet analysts have maintained sell ratings throughout the entire rally.