Have the good times for CBA, Westpac, NAB and ANZ come to an end?

The S&P/ASX 200 Financials Index has fallen 6.5% over six consecutive sessions, weighed down by poor earnings updates from major players like NAB, Westpac, and Bendigo Bank.

This marks one of the steepest corrections since September 2024, when the index dropped 6.3% over ten days as investors rotated out of banks and into beaten-down mining stocks. However, the catalyst this time is different, with three leading banks flagging a broad range of pressures, including shrinking net interest margins, higher funding costs, and intensifying competition.

The implications are particularly significant for Commonwealth Bank. Before the selloff, CBA shares had surged 42% over the past year, pushing its price-to-earnings ratio to a record 28x — more than double that of the other big three banks.

CBA has long been seen as a safe haven in Australian equities, thanks to its dominant position in home lending and superior growth rates relative to peers. At the bank’s half-year earnings call, CEO Matt Comyn highlighted CBA’s market dominance, noting it now accounts for "more than 45% of all proprietary home lending in Australia."

As cracks begin to show, investors can't help but wonder: have the good times come to an end?

Bendigo Bank's 20% selloff

Bendigo & Adelaide Bank BEN was the first culprit, reporting a much weaker-than-expected first half result. The key numbers to note include:

• Cash earnings after tax down 1.1% to $265.2 million vs. $284.5 million consensus (6.7% miss)

• Net income impacted by higher funding costs, including both deposits and wholesale funding

• Net interest margin up 5 bps to 1.88% vs. 1.94% consensus (6 bp miss)

Expanding on margin pressures, CEO Richard Fennell noted that "a change in customer preferences for longer-dated, more expensive term deposits and continued growth in offset accounts has impacted our funding costs and earnings."

He also highlighted that the company's residential lending is growing at twice the pace of its peers. While that's typically a good thing, such growth is eating into its surplus capital, forcing it to rely on more expensive funding and potentially limiting a higher dividend payout.

Bendigo Bank shares closed the results session (17 Feb) down 15%, hitting a near 10-month low.

Bendigo Bank price chart (Source: TradingView)

Westpac's first quarter falls short

That same day, Westpac WBCreleased its first-quarter FY25 trading update, which fell slightly short of expectations and lacked the upgrades the market had started to price in.

"Following a string of upgrades in FY24, the share price had started to reflect further revenue beats and capital management," Macquarie noted on Monday.

Analysts were unimpressed by softer-than-expected margins and the absence of new capital management initiatives. While lower bad debts and delayed cost growth provided a temporary boost, concerns remain over rising expenses as investment spending ramps up under the UNITE program.

"Westpac remains expensive, trading at approximately 17x FY26 PE (in line with NAB and at a 26% premium to ANZ)," Macquarie warned.

Westpac shares fell 4.0% on Monday, 17 February, and extended losses by another 6.3% over the next three sessions.

NAB's two issues

NAB may be the final straw, with its first-quarter FY25 trading update sending the stock down 8.1% on Wednesday, 19 February.

Morgan Stanley analysts said the update raised questions about factors including margin trends and further capital management prospects. The key takeaways from the research note include:

Softer margin trends: NAB’s margins fell 2 basis points from the 2H24 quarterly average, weaker than expected, as lending and funding headwinds offset the replicating portfolio tailwind.

Less excess capital, smaller buybacks: The biggest surprise in the 1Q25 update was a ~35bp shortfall in the CET1 ratio. While some factors may reverse over time, the lower ratio dampens expectations for future buyback sizes.

The 8.1% tumble marks NAB’s largest single-day decline since 23 March 2020, when pandemic-driven panic sent the stock tumbling 11.3%. Excluding pandemic-related selloffs, this is its steepest fall since 2016.

NAB price chart (Source: TradingView)

Putting it all together

Banks have experienced an impressive run over the past 12–24 months. While many view their valuations as "priced to perfection," this isn't a concern — provided they continue to meet earnings expectations. So far, they have done just that, particularly over the past two earnings seasons.

In the case of CBA, analysts project 5% earnings growth for FY25, followed by little to no growth in FY26 and FY27. Despite these modest expectations, CBA's first-half results exceeded market forecasts by around 1.5% in profits, margins, and dividends. Yet, its share price has surged ahead, seemingly unsupported by substantial earnings growth. This leaves little room for error or headwinds.

But now, cracks are starting to show. Sector-wide margin pressures and weakening capital flexibility are eroding the premium valuations banks have built up. Then again, given how they’ve rallied with little fundamental justification, should we really be surprised?