RBA interest rate rise threatens CBA, Westpac and NAB profits as Australian mortgage and house prices weaken

The major banks’ profit margins are set to fall as higher interest rates slow mortgage growth and force lenders to offer borrowers more attractive interest rates.

Next Tuesday, the Reserve Bank is expected to deliver its fourth interest rate rise of 2026, to take the cash rate to 15-year high of 4.6 per cent.

Since the start of May, analysts at Morgan Stanley have cut their financial year 2027 profit forecasts for the major banks by an average of 7 per cent.

“There has been a major shift in operating conditions due to RBA rate hikes, a higher cost of doing business and cost of living, and changes to property-related tax concessions,” said banking analyst Richard Wiles. “We believe the downside risk from rate hikes outweigh the upside risks.”

Morgan Stanley has an underweight rating on shares in Westpac, Commonwealth Bank and National Australia Bank.

Shares in CBA are down 11.7 per cent over the past six months, while NAB and ANZ Bank have both lost around 10 per cent.

Brokers back ANZ revival as house prices weaken

The only major bank to post positive returns is ANZ Bank, as investors cheer chief executive Nuno Matos’ plans to cut operating costs and win customers with more attractive mortgage rates than its peers.

The stock is up 3.8 per cent over the past six months to heavily outpace the negative returns of its rivals.

Morgan Stanley still rates Australia & New Zealand Bank shares a buy, versus the underweight rating on its three peers.

On Tuesday, Macquarie Group’s annual Mortgage Broker Survey showed 80 per cent of mortgage brokers had seen a drop in property investor enquiries since Labor’s Budget ended most tax breaks from July 1, 2027. Enquiries from owner occupiers looking to secure a home loan have dropped by 40 per cent over the same period.

Labor’s May 2026 Budget has also sent house prices falling for five consecutive months in Sydney. AMP Chief Economist Shane Oliver now expects national house prices to fall 10 per cent from their peak, with the household wealth wipeout extending as far as June 2027.

Macquarie’s survey also showed banks’ profit margins are coming under pressure as lenders compete more aggressively for borrowers in a slowing housing market.

The mortgage brokers that connect home loan borrowers to the lenders also rated ANZ’s pricing as some of the best over 2026, the survey showed.

“ANZ is now seen as the most competitive among major banks, with a 42 per cent year-on-year increase in brokers calling it out as the most competitive,” Macquarie said. “ME Bank is also seen as highly price competitive, while CBA and NAB are seen as the least competitive.”

Compared with this time last year, Macquarie said ANZ had jumped from being viewed as the least competitive lenders on home loan pricing to one of the most competitive.

“ANZ has sharpened pricing, especially on investor and interest-only loans, while also offering cashbacks on refinances,” it said.

However, ANZ is still viewed by brokers as one of the slowest banks in assessing loan applications, with CBA and Bankwest thought to be among the quickest.

Macquarie suggested ANZ’s perceived slowness may be related to ongoing issues around its $4.9 billion acquisition of Suncorp Bank, which is due to complete in 2027.

Macquarie’s own home loan division, which has rapidly grown its market share over the past few years, is perceived by brokers to have the best processes and digital systems for arranging loans.

Valuation worries

Despite the rising interest rates and forecasts for sinking house prices in Australia, Morgan Stanley warns that all four big banks still trade on valuations that look high by historical standards.

“We find it hard to identify reasons why the banks should trade at a premium to their five-year post-COVID averages given operating conditions are far less favourable than the past two years,” said Mr Wiles.

The analyst also warned that most profit forecasts assume bad debts will remain low, with borrowers able to absorb higher mortgage costs even as interest rates rise.

“There is emerging stress in the property and construction sector,” Mr Wiles said.

Markets are now pricing in an 88 per cent chance the RBA lifts rates next Tuesday.

Economists at ANZ Bank even expect the central bank will deliver a fifth rate hike in 2026 on Melbourne Cup day, taking benchmark borrowing rates to 4.85 per cent.