Bank shares have been a reliable place for investors to hide this year, but the mood is starting to shift.
The 'big four' are under pressure again on Wednesday after Morgan Stanley (NYSE: MS) warned that conditions have turned against the sector faster than expected.
Commonwealth Bank of Australia (ASX: CBA) shares are down 0.71% to $161.73 at the time of writing.
Westpac Banking Corp (ASX: WBC) is down 1% to $36.02, National Australia Bank Ltd (ASX: NAB) is 1% lower at $36.73, and ANZ Group Holdings Ltd (ASX: ANZ) is down 1% to $35.31.
The falls add to a rough month for the banks. CBA has dropped 9%, Westpac is down 9%, NAB has lost 14%, and ANZ has fallen 7%.
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Morgan Stanley sees more trouble ahead
According to The Australian, Morgan Stanley analyst Richard Wiles believes operating conditions for Australia's major banks have "deteriorated rapidly".
The broker is now expecting consensus earnings per share (EPS) forecasts to fall after a soft reporting season.
Wiles pointed to several pressures landing at once. These include the three RBA interest rate rises, proposed property tax changes in the federal budget, and the global energy shock.
Morgan Stanley had previously lifted its earnings forecasts for the 'big four' by about 4% in February. It has now cut them by a similar amount, with larger downgrades aimed at NAB and Westpac.
Margins and bad debts in focus
Bank investors usually pay close attention to margins, credit quality and capital strength. On those measures, the latest reporting season gave the market a few reasons to be careful.
The Australian reported that margin trends disappointed, while the four major banks set aside about $800 million in extra provisions for potential bad loans.
Capital levels at CBA and NAB also came in below expectations.
NAB has already moved to strengthen its position, raising about $1.8 billion through its dividend reinvestment plan (DRP).
Dividend growth expectations have also cooled. Management teams at CBA, NAB and Westpac have signalled that payout ratios are likely to move back toward the middle of their target ranges.
Valuations still look stretched
Furthermore, the major banks are trading on an average 12-month forward price-to-earnings (P/E) multiple of 18.5 times.
Wiles sees more room for that multiple to fall. His order of preference is ANZ first, followed by Westpac, NAB and CBA last.
CBA remains the standout premium stock in the sector, with a market capitalisation of about $270.65 billion. But its share price is now down 6% over the past year.
ANZ has held up better over 12 months, rising 22%, but it is still down 3% in 2026.
Foolish takeaway
The big four banks are still some of the most profitable businesses on the ASX. But after a strong run, investors are starting to question whether their share prices still leave much room for disappointment.
Lower margins, rising bad debt risks and slower dividend growth aren't a great mix.
Morgan Stanley's warning suggests the sector may need more than steady earnings to keep investors happy.
