Key takeaways

• Higher interest rates and a strong labour market underpinned strong performance from Australia’s Big Four banks.

• Rate cuts typically reduce interest income, but lower funding costs and deposit repricing can help protect margins.

• Monetary easing tends to stimulate borrowing, refinancing and spending, while it has also historically supported property market growth.

• Key challenges to the performance outlook of the banks include intensifying competition, a weaker labour market, and affordability constraints that could limit mortgage growth.

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Australia’s Big Four in focus

Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC), ANZ (ASX: ANZ) and NAB (ASX: NAB) dominate Australia’s financial sector and rank among the largest companies on the S&P/ASX 200 index by market capitalisation – and control the majority of the mortgage market.

Their exposure to housing, combined with their status as some of the ASX’s highest dividend payers, has long made them central to Australian investors’ portfolios.

With inflation easing, the Reserve Bank of Australia (RBA) cutting interest rates, and property prices rising again, investors are asking whether the Big Four can sustain performance or whether much of the good news is already priced in.

What has supported recent gains?

The Big Four banks have delivered strong performance in recent years, supported by higher interest rates, solid employment conditions and rising property prices.

The labour market has been particularly important. Australia’s participation rate has remained above 66% since early 2022. Although unemployment has edged higher through 2025, it remains low by historical standards, helping to contain arrears and bad debts.

Property prices have also resumed their upward trend in 2025 following a short downturn in late 2024. As mortgages represent the majority of the Big Four’s assets, rising values have reduced loan-to-value ratios and strengthened balance sheets. 

What does a lower interest-rate environment mean?

The RBA cut the cash rate in February 2025 for the first time in four years, with further reductions in May and August. This shift to monetary easing is expected to continue into 2026.

For banks, lower rates bring both headwinds and opportunities. Variable-rate mortgages mean reductions are often passed through to borrowers, reducing interest income. However, banks also benefit from cheaper wholesale funding and often adjust deposit rates more quickly than lending rates, which can help protect net interest margins.

Lower borrowing costs typically stimulate credit demand. Households tend to refinance or take on new loans, while businesses – a segment the banks have been prioritising for higher returns – may also be more willing to invest as confidence improves. Lower rates also tend to reduce bad and doubtful debts if employment conditions remain supportive.

The main challenge is competition. Mortgage lending remains highly contested, and continued pricing pressure could weigh on margins even if volumes increase.

How could housing trends affect bank performance?

Housing is a critical driver of bank performance. Since the RBA’s first cut in February 2025, property prices have strengthened, with August recording the sharpest monthly rise since May 2024. Analysts, including KPMG, forecast further growth over the year ahead.

Rising property values benefit banks by improving loan-to-value ratios, reducing default risk and potentially allowing provisions for bad debts to be released. A stronger housing market can also lift activity through new mortgage lending, refinancing and broader credit expansion.

However, affordability remains a constraint. Higher prices may make it harder for buyers to enter the market, while limited housing supply could dampen transaction volumes, capping overall mortgage growth.

What is the investment case for the Big Four?

Over recent years, Australia’s major banks have been supported by the combined effects of higher interest rates, strong employment and improving property prices. The transition into a lower-rate environment presents a more balanced picture.

Falling interest income represents a clear headwind, but this could be offset by cheaper funding, deposit repricing and stronger lending volumes if demand holds up. At the same time, housing remains supportive, though affordability and supply constraints pose risks. Competition across the sector adds another layer of pressure on margins.

For investors, the outlook for the Big Four will depend on how effectively the banks manage these competing forces. With both risks and opportunities in play, assessing whether current share prices already reflect these dynamics will be central to any investment decision.