Morgan Stanley warns that Australia's major banks face potential risks of profit downgrades

LootboxPhobia · 2026-03-17T19:47:51+00:00

Morgan Stanley analyzed the potential earnings downgrades of Australia's major banks amid economic uncertainty, forecasting a 7-11% reduction in earnings for fiscal year 2027. In a possible slowdown scenario, the National Australia Bank would face the largest decline. The analysis also highlights that in an uncertain environment, risks to profits and valuations are heightened, and these banks may underperform the ASX 200 index in the future.

LootboxPhobia

2026-03-17 19:47:51

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Investing.com – Morgan Stanley outlined potential downside scenarios for Australia’s major banks amid increasing economic uncertainty, indicating that earnings for fiscal year 2027 could be downgraded by an average of 7-11%.

The investment bank has not yet changed its current forecasts for the major banks but analyzed two slowdown scenarios that could impact profits. These scenarios assume slower loan growth, higher impairment charges, and a return to pre-COVID-19 pandemic levels.

Under these scenarios, National Australia Bank (ASX:NAB) faces the largest potential downgrade of 9.5-14.5%, followed by Commonwealth Bank of Australia (ASX:CBA) at 6-9%, Australia and New Zealand Banking Group (ASX:ANZ) at 5.5-10%, and Westpac Banking Corporation (ASX:WBC) at 5.5-9.5%.

Morgan Stanley noted that the banking sector has experienced stronger loan growth, better profit margins, and lower loan losses over the past 6-12 months. However, the firm states that recent developments could fundamentally change the operating environment.

Morgan Stanley said that uncertain conditions increase the risk of profit downgrades and valuation declines, raising the possibility that banks could underperform the ASX 200 index in 2026.

If the outlook worsens, the analysis suggests that Commonwealth Bank will be the most resilient, while National Australia Bank will be most vulnerable to a slowdown scenario. ANZ is considered less affected than in the past.

Morgan Stanley currently forecasts an average loss rate of 10 basis points on total loans or 28 basis points on non-housing loans for FY2027.

The firm’s bear case valuation is on average 32% below current prices. These valuations incorporate low single-digit loan growth, mid-single-digit profit margin declines, and 15-20 basis points of loan loss rates. This implies a 12-17% earnings decline in FY2027 compared to the baseline scenario, with return on equity ranging from 8.5% to 12.5%.

In this scenario, Morgan Stanley applies a bear market price-to-book multiple of 1.3-2.2x, compared to the current multiple of 1.6-3.8x and COVID-19 pandemic lows of 0.7-1.4x.

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