What Does 2025 hold for ASX Banks? Is it too late to hop on the bandwagon?

The performance of ASX banks has caught the attention of significant investors and market analysts. This sudden market change has led to a critical evaluation: is this trend a warning signal indicating systemic issues, or does it present a bargaining opportunity for experienced investors?

Let’s navigate this complex landscape of stocks and shares while considering the broader economic context influencing financier sentiment.

Recent Performance of ASX Banks

In 2024, ASX bank stocks experienced significant fluctuations, with major banks generally outperforming the broader market. The ASX 200 Index (ASX: XJO) rose by approximately 8.2% over the year. However, the ASX 200 Banks Index rose over 30%, and individual bank performances also beat the market.

• Commonwealth Bank of Australia (ASX:CBA): The share price increased by 37%, reflecting strong investor confidence and a clear ‘up yours’ by retail investors to the establishment of analysts and institutional investors.
• Westpac (ASX:WBC): The share price jumped 41%, indicating robust market performance. It is in a kind of ‘mushy middle’, being well established and lacking the growth opportunity of other banks, but being squeezed out by CBA – its loan book fell in the September quarter by $200m, arguably penny change for a bank with a $470bn book but some analysts labelled it ‘concerning’.
• National Australia Bank (ASX:NAB): The share price rose by 22%, showcasing solid growth. NAB is in a similar position to Westpac with a declining loan book. Its most recent annual results were not received well by investors with an 8% decline in profit. But the bank is taking efforts to increase its share, targeting digital-only loans through proprietary channels (in other words through their own channels and not brokers).
• ANZ (ASX:ANZ): The share price climbed 11%, demonstrating moderate appreciation. 2025 will be a year of CEO transition and the first full year that it will have ANZ Plus rolled out, not to mention Suncorp’s retail operations fully integrated.

Factors Contributing to the Performance of ASX banks

• Interest Rate Dynamics: The Reserve Bank of Australia (RBA) maintained the official cash rate at 4.35% throughout 2024. High interest rates increased deposit and funding costs for banks, leading to the compression of net interest margins and profitability performance. The potential for rate cuts in 2025 adds uncertainty to future earnings. Now yes, rate cuts may cause a decline in bank earnings, but maybe not as much as they did during the pandemic given the higher quality of their loan books than back then. Plus, it is not as if rates will go to zero again.
• Housing Market Trends: The Australian housing market showed signs of weakening, particularly in major capital cities like Sydney and Melbourne. Declining house prices in those areas impacted banks’ mortgage portfolios, leading to concerns about asset quality and future earnings. Yes, other areas of Australia have seen stronger performances, but it may not be enough to offset any price declines in the cities.
• Regulatory Environment: Increased regulatory scrutiny led to higher operational costs for banks. Compliance with new regulations required significant investment in risk management and technology, straining short-term profitability.
• Global Economic Factors: International economic conditions, including trade tensions and global market volatility, created an uncertain environment. Australian banks, with their exposure to global markets, were susceptible to these external shocks, leading to cautious investor behaviour.

Assessing the Financial Health of ASX-Listed Banks

Despite these challenges, Australian banks maintain robust financial positions:

• Capital Adequacy: Major banks have strengthened their capital buffers, ensuring resilience against economic downturns. For instance, the Commonwealth Bank of Australia (CBA) reported a strong Common Equity Tier 1 (CET1) ratio of 11.8%, well above regulatory requirements.
• Profitability Metrics: While there has been a slight decline in profits due to margin pressures, banks continue to report substantial earnings. CBA announced a net profit after tax of A$2.5 billion for the first quarter of the 2025 financial year, reflecting a 5% increase in operating income.
• Dividend Yields: Australian banks are known for their attractive dividend payouts. Despite recent stock price declines, dividend yields remain competitive, providing a steady income stream for investors. For example, Bendigo and Adelaide Bank offer a dividend yield of over 6%, appealing to income-focused investors.

Broader Economic Context

The Australian economy exhibits both strengths and vulnerabilities that influence the banking sector:

• Economic Growth: The International Monetary Fund (IMF) projects Australia’s GDP growth to be around 2.0% in 2025, indicating modest economic expansion.
• Inflation and Monetary Policy: Inflation rates and the RBA’s monetary policy decisions are critical. The potential for interest rate cuts in 2025 could impact bank margins and investor sentiment, influencing stock valuations.
• Global Market Influence: The performance of international markets, particularly in the United States, can affect Australian banks. For instance, the US Federal Reserve’s policies and global economic trends can influence investor behaviour and capital flows into Australian financial markets.

Investor Considerations: Red Flag or Bargain Opportunity?

Given the current landscape, investors should weigh the following:

• Valuation Levels: Some analysts argue that bank stocks are overvalued, with share prices not fully reflecting potential risks. For example, Citi analysts have warned of possible declines in share prices of up to 30%, citing inflated valuations and muted earnings growth.
• Earnings Outlook: The sustainability of earnings and dividends is under scrutiny. While banks have historically provided stable returns, factors such as increased competition and regulatory costs may pressure future profitability.
• Market Sentiment: Investor sentiment plays a significant role in stock performance. Recent sell-offs may indicate broader concerns about the banking sector’s prospects, influenced by both domestic and international economic conditions.

Conclusion

The potential performance of ASX banks in 2025 is a hotly contested topic and there are arguments to be made both ways. While certain indicators suggest caution due to potential overvaluation and external economic pressures, the fundamental strength of Australian banks offers a degree of confidence.

Investors should conduct thorough due diligence, considering both macroeconomic factors and individual bank performance metrics, to make informed decisions aligned with their investment objectives and risk tolerance. If you invest in banks for dividends, we do not expect any investors to be disappointed. But of course, some banks will perform better than others.

We think ANZ will be the most interesting to watch with its new CEO starting in July and potentially the most appealing to invest in given it is finally catching up to its peer digitally.

What are the Best ASX Stocks to invest in right now?

Check our buy/sell tips