Australia’s major banking institutions are confronting their most challenging operating environment in decades as mortgage market disruptions and economic headwinds drive investors away from what were once considered reliable stock picks.
The nation’s banking sector had previously outpaced the broader market by approximately double in 2025, attracting investors with dependable dividend payments while benefiting from record-breaking property values and strong credit performance.
Banking shares have faced mounting pressure since the start of the Iran conflict, with oil supply concerns raising economic growth worries, and the decline accelerated this month following modifications to housing tax regulations.
From late February through recent trading, National Australia Bank has dropped 23%, Westpac has fallen nearly 14.5%, ANZ has declined 11.2%, and Commonwealth Bank has decreased 5.6% — placing them among Asia’s worst-performing banking securities.
This downturn signals a cyclical shift for Australia’s major financial institutions as they confront the possibility of additional weakness in the A$2.4 trillion ($1.7 trillion) home loan market.
Mortgage market expansion difficulties coincide with monetary policy challenges, as the central bank implemented its third rate increase this year in May, bringing borrowing costs back to post-pandemic peaks.
“Aside from COVID, we cannot recall a time in the past 25 years when the operating conditions for banks have shifted so quickly,” Morgan Stanley’s Australian banking analyst Richard Wiles said.
“Three RBA rate hikes, proposed changes to property-related tax concessions in the federal budget, and the potential direct and indirect effects of the global energy shock have created a far more uncertain outlook for the Australian banks.”
Property-related tax concession modifications targeting real estate investors, announced earlier this month, are anticipated to reduce mortgage lending activity and weaken home loan demand while pressuring bank profit margins, according to industry analysts.
Morgan Stanley projects Australian housing prices could decrease between 5% and 10%, representing the sector’s steepest drop in four decades, potentially reducing mortgage expansion to approximately 3%-4% next year from the current 7.5%.
The mortgage business challenges follow the country’s leading banks allocating A$955 million collectively for loan-loss provisions, citing indirect costs from the Iran conflict.
Home loans represent roughly 60% of the “Big Four” Australian lenders’ total credit portfolios, based on regulatory information, and have gained increasing importance for earnings as these institutions pull back from wealth management, financial advisory services, and international assets. Australian banks face greater housing market exposure than international counterparts, where mortgages typically comprise 40%-50% of loan books, analysts note.
CBA leads the home lending market with a 25% share, followed by Westpac, NAB, and ANZ, according to their most recent financial reports. All four institutions declined to provide commentary regarding mortgage slowdown impacts when approached.
K2 Asset Management Managing Director George Boubouras noted the mounting difficulties reveal insufficient revenue diversification at Australian lenders compared to global competitors in sectors like investment banking, research, and equity trading.
Major U.S. banks have seen their stock prices recover from late February declines triggered by the conflict.
“This puts an over-reliance on domestic housing for Aussie banks,” he said, adding that the changes to property-related tax concessions would tighten lending standards and increase capital costs.
With mortgage expansion slowing, banks show limited interest in aggressive pricing competition. Financial institutions are expected to concentrate more heavily on expense reduction to preserve margins as credit demand weakens.
“It is a bit of a zero-sum game in Australia if you try to win with price, and they’ve all learnt the hard way,” said Andrew Martin, co-chief executive of fund manager Alphinity, which owns shares in the four major banks.
Macquarie analysts have reduced earnings per share projections for the banking sector by up to 2% in 2027, and between 2% and 4% in 2028. They also lowered the banks’ price target recommendations by up to 4%.
Several Australian banks have initiated workforce reductions, offshore operations transfers, and technology updates — moves analysts expect to accelerate if revenue growth remains sluggish. These institutions are also streamlining systems and expanding automation to decrease operational expenses.
International ownership of Australia’s major banks has increased over the past two years, with overseas investors now controlling roughly one-quarter to one-third of shares. This foreign interest helped make CBA the world’s most valuable lender last year.
“We’re cautious on the outlook. They still look pretty full from a valuation perspective,” said Andy Forster, senior investment officer at Argo Investments, which owns shares in the four banks.
“Dividends probably can be protected, but there’s a little bit of risk there … definitely don’t feel like they’re going to grow.”
