NAB ranked top Big Four bank by Morgan Stanley as lending rebounds
NAB rises to top of Morgan Stanley's major bank rankings after strong margins and loan growth, while Westpac drops to least preferred.
Source: iStock
Mentioned
KEY POINTS
- NAB has become Morgan Stanley's preferred major bank due to solid execution on strategic priorities and attractive 9-point PE discount to CBA, while Westpac drops to least preferred amid 2026 earnings headwinds.
- Australian mortgage growth has accelerated to 6% with all major banks growing in line with the system, while business lending continues to outperform expectations supported by lower rates and improved consumer confidence.
- Bank margins showed unexpected resilience in June quarter with NAB and Westpac delivering 4 bp underlying margin improvements, though current valuations already reflect most positive scenarios going forward.
Australia's major banks are enjoying their best operating conditions in years, with robust loan growth and easing competitive pressures driving a strong June quarter performance, according to Morgan Stanley.
"We believe a better operating environment, low earnings risk and healthy balance sheets will keep trading multiples above post-COVID averages," the analysts said in a note on Thursday.
The investment bank lifted the target price of the Big Four by 7-10%, implying an average FY26 price-to-earnings of ~16.5x and bumped up NAB as its top pick while demoting Westpac to least preferred amid diving earnings outlooks and execution risks.
Strong quarter delivers margin relief
The June quarter marked a turning point for bank profitability, with margins showing unexpected resilience after months of pressure from deposit competition and unfavourable lending mix shifts.
NAB (ASX: NAB) and Westpac (ASX: WBC) both delivered significant margin beats, with underlying margins up 4 bps at both banks, around 5 bps better than Morgan Stanley forecasts. This improvement reflected more modest headwinds from mortgage competition, successful deposit repricing (particularly at Westpac), and reduced impact from business lending competition.
Australian mortgage growth has accelerated to a 6% run-rate, with ANZ, CBA and NAB all growing in line with the broader system. Business lending continues to outperform expectations, supported by lower interest rates, improving consumer confidence and strong government spending.
Source: Morgan Stanley Research
NAB Emerges as Top Pick
NAB is the only Overweight-rated bank, with the analysts citing its solid progress on three strategic priorities:
Protecting SME banking leadership
Improving deposit gathering,
Increasing proprietary mortgage origination.
NAB's third-quarter trading update addressed key investor concerns, demonstrating that increased business lending competition isn't creating outsized revenue risks while highlighting "early signs" of stabilising SME credit quality.
A combination of 6% forecast earnings growth, 11.5% return on equity for FY26, and attractive relative valuations (trading at a 9-point P/E discount to CBA) makes it the most compelling option among the majors.
Westpac faces mounting challenges
At the other end of the spectrum, Westpac has been downgraded to Underweight as Morgan Stanley warns of emerging headwinds in 2026.
While Westpac benefited from earlier-than-peer deposit repricing in recent quarters, analysts expect this advantage to fade. The bank faces below-system mortgage growth, margin pressures, and higher execution risk around its UNITE technology transformation programme.
New CEO Anthony Miller appears willing to accept short-term costs to regain market share in proprietary mortgages and SME lending, but this strategy brings uncertainty around near-term earnings delivery.
Credit quality remains benign
Impairment charges across the four majors totaled just $630 million in the June quarter, equivalent to 7 basis points of loans and in-line with recent quarterly averages. Non-performing loans increased only modestly, with NAB specifically noting early signs of stabilising business credit quality.
Source: Morgan Stanley Research
Morgan Stanley forecasts impairment charges will rise from an average 20 bps of non-housing loans in FY25 to 29 bps in FY26, but sees potential for another year of lower-than-expected losses if credit conditions continue improving.
Dividend sustainability improves
Recent concerns about dividend sustainability have eased, particularly for Westpac and NAB, as stronger earnings and capital positions reduce the risk of cuts.
Westpac now has more capital flexibility, with dividend payout ratios expected to remain around the top end of its 65-75% target range.
However, ANZ faces higher dividend risk given its smaller capital buffer, above-target payout ratio, and CEO transition.
Source: Morgan Stanley Research
Valuations reflect bull case scenario
Despite the positive operating backdrop, Morgan Stanley cautions that current trading multiples already factor in a high probability of the bull case, with consensus estimates assuming almost everything goes right for the major banks.
The revised price targets imply an average FY26 PE multiple of 16.5x and price-to-book ratio of 1.9x, both above post-COVID averages of 15.5x and 1.7x respectively.
For investors, the key will be whether the banks can consistently deliver against these elevated expectations while navigating the transition to lower interest rates, intensifying competition for deposits and quality lending opportunities.
