Just about every analyst has a neutral or negative view on the big 4 banks.
Following their dominant performance over the past 2 years, the consensus view is that they have become fully valued or overvalued.
The most extreme example is Commonwealth Bank of Australia (ASX: CBA).
A 21 July Australian Financial Review article revealed that Hedge Fund Sage Capital had recently doubled down on its short position in CBA shares. This comes despite the ASX 200 bank's dramatic surge over the past few months hindering the fund's returns.
In his latest note to investors, Sage Capital portfolio manager Sean Fenton told investors that he was sticking with his position on CBA, noting that the bank had become the most expensive banking stock in the world.
While CBA shares have declined around 8% from their June peak of $192, many experts believe they have further to fall.
Broker Macquarie has a price target of $105 on CBA shares. Its price targets for the other three big 4 banks are also below current share prices.
So, investors appear to be left with no attractive options in the big 4 banking space.
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An alternative: non-bank lenders
Those looking for exposure to the financial services sector may wish to consider non-bank lenders.
According to a 15 July report, Australian Non-bank Lenders by Macquarie Group, rate cuts and funding costs continue to support the non-bank sector.
Macquarie said data had revealed that non-banks (as a whole) have increased their market share of new mortgage flows. The broker also expects conditions to continue to improve for non-bank lenders.
With market pricing in further rate cuts, mortgage competition may ease from the banks as deposit profitability becomes impacted, giving non-bank lenders room to compete and grow volumes or expand margin.
However, the broker also acknowledged that the competition dynamics had changed:
As our Lendi Mortgage Pricing Index shows, bank mortgage spreads are largely unchanged in the past 18 months. However, competition has moved from banks to non-banks. Discussions with management and brokers suggest some non-bank lenders are taking advantage of the improved funding environment and competing aggressively on mortgages. In addition, there are newer entrants into the market as well who focus on prime mortgages given easier credit decisioning. We expect the growth-oriented strategies of non-banks to put some pressure on margins and/or volumes.
Therefore, while investment opportunities exist within the non-bank sector, investors must be selective.
Investors should keep this in mind when considering alternatives to the big 4 banks.
Where does the broker see value?
In its research note, Macquarie also named two non-bank lenders it expected to outperform and two on which it held a neutral view.
The broker said non-banks had performed very strongly in 2025, rallying ~10-45%.
At the beginning of 2025, Macquarie preferred Liberty Financial Group Ltd (ASX: LFG) and Pepper Money Ltd (ASX: PPM) due to tailwinds and on valuation grounds.
However, after rallying 34% for the year to date, Macquarie has downgraded Pepper Money from outperform to neutral with a price target of $1.77.
The broker has retained an outperform rating on Liberty Financial Group and price target of $4.30.
The broker also has an outperform rating on Australian Finance Group Ltd (ASX: AFG) and a price target of $2.20. Meanwhile, Resmiac Group Ltd (ASX: RMC) has been assigned a neutral rating and a price target of $0.95.
