Investors looking for banking exposure outside of the big 4 banks may consider adding a regional bank to their portfolio.
Previously, the big 4 banks have been considered a relatively safe investment. However, after very strong share price performance over the past couple of years, their valuations have become stretched.
This makes forward returns far less compelling.
Macquarie recently reiterated its neutral rating on National Australia Bank Ltd (ASX: NAB) and ANZ Group Holdings Ltd (ASX: ANZ), and underweight rating on Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA).
According to the broker's price targets, the big 4 banks will go backwards over the next 12 months. Macquarie rates Commonwealth Bank of Australia as the most overvalued, while it expects ANZ to hold up best over the next year.
Is it time to consider a regional alternative?
ASX banking stocks are core holdings in many Australian investors' portfolios.
While there are many high-quality international banks to consider, such as JP Morgan Chase & Co (NYSE: JPM), many Australians prefer to invest in companies that they know due to home bias.
Accordingly, ASX investors may be looking at regional options that they recognise.
In a 9 July note, Macquarie provided commentary on the outlook of two ASX-listed regional banks.
Bendigo and Adelaide Bank Ltd (ASX: BEN) has a market capitalisation of $7.3 billion, making it significantly smaller than the big 4 banks.
Over the past 12 months, it has risen 11%.
Commenting on its upcoming earnings result, Macquarie said:
We see modest downside risk to 2H25 results and are ~1% below of consensus on a pre-provision basis. This is driven by a combination of weaker volumes and non-interest income. Further ahead we continue to see sizeable downside risks to consensus pre-provision earnings of 3% and 8% in FY26E and FY27E, respectively.
Macquarie has an underperform rating and price target of $10.25 on Bendigo and Adelaide Bank. Based on yesterday's closing price of $12.91, this suggests 21% downside from here.
The broker also commented on regional bank, Bank of Queensland Ltd (ASX: BOQ).
Regarding its upcoming earnings result, Macquarie said:
We are <1% below consensus for FY25E earnings, driven by offsetting factors of weaker volumes, but better margins. Further ahead we continue to see significant downside risk to pre-provision earnings, and are 5% and 8% below consensus in FY26E and FY27E.
Macquarie also has an underperform rating and price target of $5.75 on Bank of Queensland shares. Based on yesterday's closing price of $7.92, this suggests 27% downside from here (excluding dividends).
Foolish Takeaway
Unfortunately, Macquarie does not recommend that investors put their money into these two regional options right now either. The good news is that the broker did name one ASX banking stock it expects to outperform.
Macquarie has an outperform rating on Judo Capital Holdings Ltd (ASX: JDO) and a price target of $1.80. Given that Judo Bank shares closed at $1.60 yesterday, Macquarie believes there is 13% upside potential (plus dividends).
With slim pickings currently in the banking sector, it may be time for ASX banking enthusiasts to add Judo Bank shares to their radar.
