Goldman’s 2024 Australian banking stocks playbook: Best to worst

Aussie banks are a staple of most Aussie investors’ portfolios. And for good reason! Generally, they have delivered attractive fully franked dividends year in year out, and for the most part, investors have enjoyed a high degree of price stability.

Sure, your favourite bank won’t rocket in price like your favourite lithium stock, but you’re also not going to wake up one morning and see your investment wiped out (sorry for the reminder, lithium investors!).

If you’re looking to start a new portfolio that includes an allocation to Aussie banks, or you’re looking to supplement your existing holdings and want to know which might be the best to buy right now, then you’ve come to the right place!

Lucky for you, the analysts at major broker Goldman Sachs have run the ruler over the Australian banking sector. They’ve come up with a list of top picks as well as stocks to avoid, and I’ll share Goldman’s key observations below.  

2024 banking sector roadmap

Goldman notes a challenging environment for Aussie banks exiting 2023. Higher interest rates resulted in a slowdown in mortgage lending, causing the banks to offer what Goldman describes as “very competitive” rates to mortgagees. In fact, the broker suggests many mortgages in 2023 were written “below the banks’ cost of capital”.

As a result of stiff competition within the sector, Aussie banks start 2024 with their net interest margins (NIMs) under some pressure. NIMs are expected to continue to contract in 2024, driven by continued competition and higher “deposit and wholesale funding costs”.

Another key factor driving margins according to Goldman will be the peak in official interest rates. The broker’s economists have recently begun to factor in two 0.25% cuts in the second half of 2024, and over 1% in total by the middle of June 2025. Goldman notes “rate cuts are generally not good for bank NIMs”.

Putting all of the above together, the broker predicts the average impact on NIMs across the sector is likely to be a deterioration of 9 basis points (bp), with Westpac Banking Corporation (ASX: WBC) faring the best (-8bp) and regional player Bank of Queensland Ltd (ASX: BOQ) the worst (-18bp).

Goldman does see a few important positives for the Australian banking sector in 2024, though. On housing, it notes that new mortgage approvals “appear to have reached a trough and is beginning to inflect”. This should see mortgage growth improve to around 5.4% by the end of the June quarter, up from 4.1% growth at the end of the September quarter last year.

Goldman also appreciates the “strong capital positions” at Aussie banks, with as much as $22 billion in excess capital compared to CET1 requirements. This would likely allow them to maintain existing high payout ratios, with CBA the most likely to push its dividend payout to the top of its guidance range.

Finally, bad and doubtful debts continue to track below trend.

Goldman’s 2024 Aussie banks playbook

Given its outlook for 2024, here are Goldman’s views on each bank, ranked by them from their top pick, ANZ Group Holdings Ltd (ASX: ANZ).

ANZ Group Holdings Ltd (ANZ)

• Rating: Buy

• Price Target: $27.85 (raised from $26.66)

• Last Price to Broker’s target Difference: +8.2%

• View: Improving profitability of institutional business and business mix are key positives.

National Australia Bank Ltd (NAB)

• Rating: Buy

• Price Target: $31.17 (raised from $30.52)

• Last Price to Broker’s target Difference: +1.0%

• View: NAB has a greater exposure to business lending than peers, this segment has seen less severe competition, and NAB “stands to benefit the most” from this. NAB is also well placed to withstand current inflationary pressures facing the industry, as it has delivered the best performance on productivity growth.

Judo Capital Holdings Ltd (JDO)

• Rating: Neutral

• Price Target: $1.58 (raised from $1.57)

• Last Price to Broker’s target Difference: +56.0%

• View: JDO has a large exposure to SME lending, which has a relatively more positive growth outlook. Strong volume growth, improving NIMs, and strengthening balance sheet are also attractive.

Bendigo and Adelaide Bank Ltd (BEN)

• Rating: Neutral

• Price Target: $9.57 (raised from $9.35)

• Last Price to Broker’s target Difference: +0.7%

• View: BEN faces a challenging revenue environment due to “intense industry-wide competition”, but “is on the right path” towards achieving operational efficiencies.

Westpac Banking Corporation (WBC)

• Rating: Neutral

• Price Target: $22.85 (raised from $20.70)

• Last Price to Broker’s target Difference: -0.3%

• View: WBC’s plans to reduce costs and increase productivity creates execution risk. Reliance on consumer lending presents a “relative headwind”.

Macquarie Group Ltd (MQG)

• Rating: Neutral

• Price Target: $180.80

• Last Price to Broker’s target Difference: +0.0%

• View: “Optimistic on the business’s medium-term outlook”, MQG is “well positioned” to take advantage of the decarbonisation push and growth in infrastructure investment.

Bank of Queensland Ltd (BOQ)

• Rating: Sell

• Price Target: $5.00 (reduced from $5.15)

• Last Price to Broker’s target Difference: -15.2%

• View: BOQ’s transformation program leaves it susceptible to “inflation and third-party distribution costs”. There’s weakness in the bank’s volume momentum, and NIMs are likely to remain under pressure.

Commonwealth Bank of Australia (CBA)

• Rating: Sell

• Price Target: $82.55 (raised from $81.64)

• Last Price to Broker’s target Difference: -26%

• View: Reliance on consumer banking means CBA is “more exposed to sector-wide headwinds” including competition and consumer budget pressures. But upside risks include capital management initiatives, better placed with respect to expense control than peers.