How much could CBA, NAB, ANZ and Westpac shares fall?

Major banks could face significant downside risks to their premium valuations and earnings as recession fears mount, according to Morgan Stanley.

With global economic uncertainty intensifying, driven by Trump's tariffs and their ripple effects, the investment bank has reviewed historical drawdowns and modeled a range of loan loss scenarios to assess how much pain the sector might endure.

Recession Risks on the Horizon

Morgan Stanley’s US economics team warns that a sharp increase in protectionist policies could tip the US economy into recession. Meanwhile, their Australian Macro team thinks that the second-order effects of tariffs matter most for Australia’s macro and earnings outlook.

Against this backdrop, the bank’s analysts have stress-tested their bear case for major Australian banks — ANZ, Commonwealth Bank, NAB, and Westpac — which have already seen share prices slide by an average of 15% since peaking on February 13.

From the peak, ANZ is down 13.5%, CBA 11%, NAB 21% and Westpac 14.5%.

Despite this pullback, Morgan Stanley’s bear case valuations suggest there could be another 23% downside on average from current levels.

What's in the Bear Case?

The bear case assumes a mild economic downturn, featuring low single-digit loan growth, a mid single-digit decline in net interest margins, and loan loss rates exceeding pre-COVID averages by FY26.

Under this scenario, the average return on equity (ROE) for the major banks would slip from 11% in FY24 to 9.5% in FY26E, while their average price-to-book value (P/B) multiple would contract from 1.9x to 1.35x.

For context, the price-to-book ratio measures the company's market value against its book value (net assets). If a stock is trading at a P/B ratio of 2, this means investors are willing to pay twice the company’s net asset value, reflecting factors such as strong expected growth or brand value. "A falling P/B ratio may indicate market pessimism or broader economic factors.

The unwinding of P/B value from 1.9x to 1.35x represents a 29% contraction. While this may sound large, it isn't uncharted territory.

The below chart highlights past downturns where major banks weathered significant P/B de-ratings. Between October 2007 and January 2009, during the global financial crisis, the average P/B multiple cratered by 58% from 2.9x to 1.2x.

Lesser declines were recorded between March 2015 and February 2016 (a 32% drop from 2.3x to 1.5x) and in the early COVID shock of February to March 2020 (a 45% fall from 1.6x to 0.9x).

Source: Morgan Stanley

Loan Losses: A Key Variable

Although Australia isn’t teetering on the edge of a recession — thanks to modest direct tariff impacts and the RBA’s flexibility to lower rates — global developments are fueling worries about broader spillovers.

In its base case, Morgan Stanley forecasts loan losses climbing to 11 basis points of total loans, or 32 bps of non-housing loans, by FY26.

But the analysts also ran more severe scenarios. If non-housing loan loss rates climb to the 10-year pre-Covid average of 56 bps, FY26 earnings estimates would fall by 7%.

In a full-blown recession scenario, where losses hit 125 bps, as seen in FY20 — earnings could plunge by 25%.

A Cautious Outlook

For now, Morgan Stanley stops short of calling a recession in Australia, citing the economy’s relative resilience and the RBA’s policy flexibility. Still, the combination of softening valuations, historical precedent, and the potential for the trade war to escalate paints a sobering picture for the banking sector.