Australia's Banks: Strong today, but tomorrow?

At present, conditions for Australia’s major banks have been favourable. The domestic economy has proved resilient, credit quality remains sound, and the banks have delivered higher earnings certainty relative to the market. Bank equity valuations reflect this confidence — the major banks have re-rated materially over the past two years and are now trading at historically elevated price-to-earnings multiples.

New entrants, new pressures

Banking in Australia looks very different to how it did just two decades ago. Cash once accounted for nearly 70% of transactions; today that figure has fallen to around 13%. Mobile wallet transactions have grown from $7 billion to $160 billion in just six years. Three in four new mortgages are now originated through brokers rather than directly with a bank. These are not incremental changes — they reflect a fundamental transformation in how Australians access and use financial services.

The drivers of this transformation are both technological and global. Digital banks, fintechs, buy-now-pay-later providers, non-bank lenders, and global payment platforms have entered virtually every segment of the banking market, increasing competition and expanding consumer choice. At the same time, Australian banks have become more deeply integrated into global capital markets, relying heavily on offshore wholesale funding to support domestic lending. This has introduced a growing sensitivity to international interest rate movements, currency fluctuations, and geopolitical developments that are increasingly difficult to insulate against.

Looking beyond the near-term, however, a more complex picture emerges. The structural forces reshaping banking — technology, globalisation, and evolving regulation — are creating pressures that cyclical tailwinds alone are unlikely to resolve. Competition for deposits and lending continues to intensify as lower-cost digital players expand their market presence. The share of home loans, business lending, and deposits held by the major banks has declined steadily since 2019. Return on equity has fallen by approximately a third over the past decade and now trails comparable banking systems in the UK, US, and Canada. Rising compliance costs — driven by post-Royal Commission obligations, cybersecurity investment, and new payments infrastructure — have pushed cost-to-income ratios higher, pressuring efficiency.

An uneven playing field

A further structural tension is emerging around the question of regulatory balance. Major banks carry a broad set of community obligations — maintaining regional branches and ATMs, offering low- and no-fee accounts, funding shared payment infrastructure, and meeting the full suite of consumer protection requirements — that newer, lighter-regulated competitors are not required to match. As revenue becomes more fragmented across a growing number of players, the capacity of major banks to fund these services while also building the capital buffers that underpin system resilience deserves close attention.

This matters beyond the banking sector itself. Well-capitalised banks that are able to sustain lending through economic downturns have historically played a critical role in moderating the depth of recessions. Australia’s experience through the Global Financial Crisis — where stronger capital buffers allowed banks to keep credit flowing — stands in contrast to markets where undercapitalised institutions were forced to retrench, deepening and prolonging economic downturns.

With bank equities arguably priced for a continuation of current conditions, investors would be prudent to weigh whether current valuations adequately reflect the structural challenges that lie ahead.