A positive tailwind for Australia's big 4 banks over the last two years has been the acceleration in deposit growth from 4% to 7% year-on-year.
The increase has been underpinned by strong household deposit growth, particularly since mid-2024 when the government's stage-3 tax cuts took effect.
In a recent note to investors, Macquarie Group Ltd (ASX: MQG) explained that this mix of this growth has been supportive for banks.
This growth has been reflected in the banks' share prices too.
Over the last 12 months, Commonwealth Bank of Australia (ASX: CBA) shares have risen 44.39%. Westpac Banking Corp (ASX: WBC) shares have risen 23.3% over the same period and National Australia Bank Ltd (ASX: NAB) shares have risen 9.69%. ANZ Group Holdings Ltd (ASX: ANZ) climbed 6.71%% higher over the year.
For context, the S&P/ASX 200 Financials (ASX: XFJ) has strengthened 24.34% over the period.
What's next for deposit growth?
In its note to investors, the broker anticipates that the tailwinds from deposits will become a headwind as interest rates fall. However, stronger deposit growth could provide a modest offset.
Going forward, if deposit growth remains relatively solid relative to credit growth, it could see deposit competition remain relatively benign.
"While a moderation of deposit growth, relative to credit growth, as seen in 2018, could see higher funding costs and weigh on margins," Macquarie said.
The broker forecasts a moderation of credit growth towards 5% year-on-year. Continued high levels of government spending (>4% of GDP in FY26) are expected to see deposit growth hold around 6-7% over the next 3 years.
If our forecasts for credit and deposit growth are correct, then the funding gap (the spread between deposit and credit growth) should remain supportive for banks.
But there are risks to the broker's forecasts, mostly from higher credit growth.
While our forecasts remain for total credit growth to slow from 6.5% y/y to 6% over the next 6-12 months, continued rate cuts and early signs of a housing recovery suggest upside risk to this.
While higher credit growth would also support deposit growth, it would see the funding gap increase and potential drive funding costs higher.
If credit growth were to accelerate to 9% y/y (the level it reached during the 2022 housing boom), our model suggests deposit growth would only rise to 8%, leaving a 1% funding gap.
That would be around the highest since 2018, when higher funding costs saw banks reprice mortgage rates higher despite no change in the cash rate.
Macquarie's view on the Big 4 banks
The broker maintains its neutral rating and price target of $35 on NAB shares. The target price represents a potential 9.65% drop from Tuesday's trading level.
Macquarie has also kept its underperform rating on CBA shares and a $105 target price. This represents a potential 41.8 decline from CBA's current trading price, at the time of writing.
For Westpac, the broker maintains its underperform rating and $27.50 target price. This suggests a potential 17.78% drop in Westpac's share price from the time of writing.
As for ANZ, Macquarie has maintained a neutral position and $27.50 price target. The target price suggests a potential 9.53% drop from today's trading price.
