Morgan Stanley has outlined downside scenarios for Australia’s largest banks, estimating average earnings downgrades of 7-11% for fiscal year 2027 if a softer operating environment materialises. While the bank did not alter its current base forecasts, it tested two slowdown scenarios that assume both a pullback in loan growth and a reversion of impairment charges to levels seen before the COVID-19 period.
Under those hypothetical stress cases, National Australia Bank (ASX:NAB) would be the most affected, facing potential earnings downgrades in the range of 9.5-14.5%. Commonwealth Bank of Australia (ASX:CBA) would be relatively less impacted with a forecast downgrade window of 6-9%. Australia and New Zealand Banking Group (ASX:ANZ) is modelled to see downgrades of 5.5-10%, while Westpac Banking Corporation (ASX:WBC) could face cuts of 5.5-9.5%.
The firm noted that, over the past 6-12 months, the sector has been supported by stronger loan growth, improved margins and unusually low loan losses. Morgan Stanley cautioned, however, that recent developments could alter those operating conditions and increase the likelihood of both earnings downgrades and a market re-rating, which in turn raises the chance that the big banks could lag the ASX200 in 2026.
In its assessment of relative vulnerability, Morgan Stanley indicated CBA’s share price would be the most resilient in a downside scenario, while NAB would be most exposed. The bank’s analysis also describes ANZ as less vulnerable than it had been historically.
On credit metrics, Morgan Stanley’s current base-case forecast for fiscal year 2027 assumes an average loss rate of 10 basis points of total loans, or 28 basis points when isolating non-housing loans. In a bear case, the firm’s valuations sit on average 32% below prevailing prices and incorporate assumptions of low-single-digit loan growth, a mid-single-digit decline in margins and loss rates rising to 15-20 basis points of loans.
Those bear-case inputs would translate into fiscal year 2027 earnings downgrades of roughly 12-17% versus the base case and imply a return on equity in the range of 8.5-12.5%. To reflect the weaker scenario, Morgan Stanley applies price-to-book value multiples of 1.3-2.2 times; for context, the firm reports current multiples of 1.6-3.8 times and COVID-era lows of 0.7-1.4 times.
The analysis leaves the bank’s existing forecasts intact while signalling meaningful downside risk should the operating backdrop deteriorate. That combination - earnings vulnerability plus the prospect of multiple compression - is the central channel through which Morgan Stanley sees the big four potentially underperforming the broader market if the slowdown scenarios play out.
Investors and market participants should therefore weigh the possibility of weaker loan growth, higher impairment costs and valuation pressure when assessing exposure to Australia’s major banking names.