ASX bank shares have been one of the market's favourite hiding spots for years. But after a huge run in the past five years, one major broker thinks investors may be overstaying their welcome.
Morgan Stanley (NYSE: MS) has slapped sell ratings on three of Australia's biggest banks – Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), and National Australia Bank Ltd (ASX: NAB).
The common theme? Valuations have raced ahead of fundamentals.
In other words, the broker isn't questioning whether these are great businesses. It simply believes investors are paying too much for them.
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Commonwealth Bank of Australia
If Morgan Stanley had a least-favourite ASX bank share, CBA would probably wear the crown. In 2026, CBA shares have risen 4.7% in 2026 to $168.11 but are down 6% over 12 months.
The broker has a target price of $125 on CBA shares, implying around 26% downside from current levels.
Why so bearish? The biggest issue is valuation. CBA trades on the richest price-to-earnings multiple of any major Australian bank despite operating in a mature, highly competitive market.
Morgan Stanley also sees pressure on net interest margins, slowing earnings growth and limited upside from here after years of strong share price performance.
That doesn't mean CBA is suddenly a bad business. Far from it.
It remains Australia's largest bank, with market-leading positions in home lending, deposits and digital banking. It also consistently delivers industry-leading profitability, strong capital generation and fully franked dividends.
Quality isn't the problem. The price investors are paying for that quality is.
Westpac Banking Corp
Westpac shares have also enjoyed a solid run, climbing 4.6% over the past month. They're still down 6% this year, but remain almost 9% higher than a year ago.
Morgan Stanley believes the stock could fall around 13%, assigning a price target of $31.50.
The main risks for this ASX bank share are margin pressure, fierce competition for mortgages and deposits, and limited earnings growth as key risks. Banks continue to fight aggressively for customers, making it harder to grow profits without sacrificing pricing.
Still, Westpac has plenty going for it. Its large retail banking franchise provides stable earnings, while ongoing investments in technology and simplification should gradually improve efficiency.
Like its peers, it also offers an attractive, fully franked dividend that continues to appeal to income-focused investors.
National Australia Bank
NAB has been the strongest performer of the trio recently, jumping 9% over the past month.
Even so, Morgan Stanley isn't buying the rally of the ASX bank share. Its $34.50 price target suggests roughly 12% downside from current levels.
The broker believes business banking competition is intensifying, while slowing economic growth could eventually weigh on business lending demand and bad debts. Rising operating costs also remain a challenge.
On the positive side, NAB arguably boasts Australia's strongest business banking franchise. Its deep relationships with small and medium-sized businesses provide a competitive advantage that's difficult to replicate.
Combined with a solid balance sheet and dependable dividend payments, NAB remains a high-quality bank despite the broker's concerns.
Foolish takeaway
Morgan Stanley's message is clear: great businesses don't always make great investments when expectations become too optimistic.
For long-term investors already holding these ASX bank shares, there's little reason to panic. But for those thinking of buying today, it may be worth asking whether too much good news is already reflected in the share prices.
