As we tick over to the new FY26, all eyes will be on the big four banks, and whether they can continue their strong growth.
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The bell of the ball
The bull run that Commonwealth Bank of Australia (ASX: CBA) has been on has been well documented
It rose roughly 46% over the last financial year.
However, the rise has resulted in many analysts considering the bank stock overvalued.
Shareholders of Australia's largest company by market cap couldn't be blamed for profit taking now.
A quick recap
Amongst the other big four banks in the last 12 months, Westpac Banking Corp (ASX: WBC) rose by 24.44% National Australia Bank Ltd (ASX: NAB) rose 9.12% and ANZ Group Holdings Ltd (ASX: ANZ) climbed just 2.50% higher.
All in all, the S&P/ASX 200 Financials (ASX:XFJ) was a good place to invest over the last year, rising 25.09% over the period.
These banks benefited from higher interest rates, which improved net interest margins (NIMs)—the difference between what they earn on loans and what they pay on deposits.
The road ahead
So can these banks continue their upward climb?
The key message from broker Macquarie is: earnings may decline in 2026 as interest rates fall.
According to Macquarie, the divergence between bank share price performance and the earnings outlook continues to grow, but the broker said it expects earnings headwinds from rate cuts, with the market pricing in 3-4 more cuts.
Banks benefited from earnings resilience in FY24, but this is likely to change, and we anticipate a 2-5% downside risk to EPS in FY26.
The broker warned more RBA rate cuts would reduce bank profit margins by approximately 5–8 basis points, even after taking mitigating actions.
While banks have recently benefited from strong earnings and the ability to reprice deposits more aggressively than expected – particularly Westpac – this support is likely to fade according to the broker.
Macquarie believes ANZ has less room to adjust further, as many of its deposit rates are already low.
Commonwealth Bank stands out with a strong deposit mix, contributing an estimated $1.4–$2.2 billion to earnings, or around 2% of its return on equity. However, this advantage is likely to decline as rates fall and deposit competition increases.
Macquarie has lowered its earnings forecasts by about 1% for ANZ, CBA, and NAB and believes the broader market still underestimates how much rate cuts will hurt bank margins and profits.
As a result, further earnings downgrades could occur, which may put downward pressure on bank share prices in FY26.
Share price guidance
Macquarie's report also included updated share price targets for the big 4 banks.
- CBA received an "underperform" rating and price target of $105.00
- NAB received a "neutral" rating and price target of $35.00
- ANZ received a "neutral rating and price target of $27.50
- Westpac received an "underperform" rating and price target of $27.50.
Based on the current stock prices of the big four, Macquarie anticipates the largest stock price fall from CBA.
From its current price of $184.75, this indicates a 43.2% downside in FY26.
The broker tips a 18.8% downside for Westpac, a 11.1% downside for NAB and 5.7% downside for ANZ.
Foolish takeaway
It can be difficult to steer clear of big four bank stocks which have historically been a safe blue-chip investment.
However based on Macquarie's guidance, falling interest rates will likely hurt margins and profits over the next 1–2 years. The ability to manage deposits efficiently will be crucial, and earnings expectations may still be too high.
