Reporting Season

Why Morgan Stanley is cautious on banking stocks despite record profits

Thu 16 Feb 23, 11:10am (AEST)
Australian banknotes accumulated together
Source: iStock

Key Points

  • Morgan Stanley expects further RBA rate hikes to ultimately hurt bank stock performance later in the year
  • NAB recently revealed it now expects RBA’s peak interest rate to hit over 4%, seeing 4.1% by May 2023
  • Major bank P/E multiples have fallen by an average of approximately 2.9x since April 2022 , less than 12 months ago

International investment bank Morgan Stanley released a research note on Thursday outlining its case for caution on Australia’s major bank stocks in light of Wednesday’s Commonwealth Bank (ASX: CBA) result. 

CBA posted record profits of over $5bn on Wednesday, primarily driven by rising interest rates. 

But Morgan Stanley has highlighted risk of further de-rating on bank stocks later in the year. 

“Margin expansion and resilient credit quality have underpinned the near-term earnings outlook, as evidenced in CBA’s 1H23 result,” Morgan Stanley analysts Richard Wiles, Sally Hong and Charlie Hall wrote. 

“In our view, the investment case for Australian banks in early 2023 has been influenced by competing forces.” 

Mixed bag of considerations 

The three analysts who authored the note are cautious on further RBA tightening. 

National Australia Bank (ASX: NAB) on Wednesday revealed its newly boosted expectation of an interest rate peak over 4% by May. 

This would appear to be a sound assessment based on what Lowe has expressed since last week’s 0.25bps rise, which boils down to ‘more to come.’ 

“The speed of [the] RBA tightening cycle raises the prospect of weaker volume growth, declining margins, higher costs, and rising loan losses as the year unfolds,” the Morgan Stanley analysts wrote. 

CBA reaction as a test case 

Morgan Stanley highlighted major bank price-to-earnings (P/E) multiples have fallen by an average of approximately 2.9x since April last year. 

Further, the bank sees it likely that as RBA rate hike impacts echo into 2Q CY23 and onward, there is a higher risk of further de-rating on bank stocks. 

Morgan Stanley’s analysts also believe that despite record profits from CBA, market expectations may have been even rosier, especially with regards to P/E. 

“We believe the negative share price reaction to CBA’s result was exacerbated by high expectations and its expensive trading multiples,” the analyst team wrote.

“Against this backdrop, cautious commentary from CBA [on Wednesday] on monthly margin trends and mortgage competition has highlighted the risk of an earlier peak in margins, without any offset from other earnings.” 

CBA's one year chart
CBA's one year chart


Written By

Jonathon Davidson

Finance Writer

Jonathon is a journalism graduate and avid market watcher with exposure to governance, NGO and mining environments. He was most recently hired as an oil and gas specialist for a trade publication.

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