Funded Futures Financial Services | 4 November 2026

Why Australian Banks Might Fall (and Why It Wouldn't Mean They're Bad Businesses)

Nobody writes headlines about a bank being too reliable. Maybe someone should.

Australia’s big four banks are some of the most profitable, most dependable businesses on the ASX. They make money in good times, they make money in bad times, and most of us own a slice of them whether we realise it or not (through super, an index fund, or a few shares we picked up years ago).

So here is a question worth sitting with: if the banks’ share prices fell from here, would that mean something had gone wrong with the banks?

Probably not. And understanding why tells you a lot about how investing in Australia really works.

Price and profit are two different things

A share price is not a report card. It is the price the market is currently willing to pay for a company’s profits.

Investors measure that with something called a price-to-earnings ratio (P/E). If a company earns $1 per share and the share costs $15, the P/E is 15. It is simply “how many dollars are people paying for each dollar of profit?”

That number can change even when the business doesn’t. A company can earn exactly the same profit next year and see its share price drop, purely because investors decided to pay 13 times those profits instead of 16.

That is the key idea for this article: a falling share price does not require falling profits. It only requires investors to change how much they’re willing to pay.

Where the banks sit today

This article builds on research by Neil Margolis, Portfolio Manager at Merlon Capital Partners, in his piece Why we no longer own a major bank. Using Bloomberg consensus estimates, Merlon compared the forward P/E of the four major banks against their own history going back to 2006. The figures below are theirs, paraphrased and rounded.

The finding: all four are trading above their own 20-year median.

In the 2006 to 2011 period, all four traded at roughly 9 to 11 times earnings. The climb since then has been gradual, and it has not been the result of the banks suddenly becoming more profitable. They’ve simply been valued more generously.

To be clear, none of this is a forecast. A share can stay expensive for years (these have). It’s just a measure of the gap between what the banks cost now and what they have usually cost.

Why would investors pay so much for banks?

Two reasons stand out.

1. Consistency is valuable, and the market knows it. Australian banks are profitable, heavily regulated, and have a long record of paying dividends (often with franking credits attached). In an uncertain world, that steadiness is attractive, and investors have paid a premium for it.
2. A lot of money has to be invested, whatever the price. Australians contribute to super every pay cycle, and that money must be invested somewhere. Many default super options are measured against share market indices, and funds that lag their benchmark face real consequences. The banks make up a big slice of the Australian share market, so holding less of them than the index is a risk a fund manager may not be able to afford to take, even if they think the banks are pricey.

That creates a steady stream of buyers who are not very sensitive to price. When buying doesn’t depend on how expensive something is, prices can drift higher and stay there. (This deserves an article of its own. Stay tuned.)

The part most people miss: interest rates

Here is where it gets interesting for everyday investors.

When you can earn a decent, safe return from a term deposit or government bond, shares have to work harder to justify their price. The return on “doing nothing” (the risk-free rate) is the yardstick everything else is measured against.

If interest rates keep rising, or simply stay higher for longer, the maths changes. A dependable stream of bank profits looks a little less special when cash and bonds are paying you decently for taking almost no risk. Investors may reasonably decide they want a lower price for the same earnings.

If that happened, bank share prices could fall while the banks stayed just as profitable as ever. Profits unchanged, price lower. That is a re-rating, not a business failure.

What this does and doesn’t mean

It’s worth being clear about what we are not saying:

•       We’re not saying the banks are bad businesses. They’re quite the opposite.

•       We’re not saying their profits are about to fall.

•       We’re not saying a fall is certain. The banks may never return to their long-run multiples. Expensive can stay expensive, and anyone predicting exactly when it ends is guessing.

•       And there are fair arguments on the other side: banks overseas may be re-rating towards ours, regulators could ease capital requirements, and cost savings might stick.

What we are saying is that great business and great investment are not the same thing. The price you pay matters. A wonderful, reliable company bought at a very full price can still deliver a disappointing return, simply because the price was already assuming everything would go right.

What this means for you

If you own bank shares directly, or you own them through super or a managed fund (most Australians do), a few sensible questions to ask:

•       How much of my portfolio is in the banks? Many Australians hold far more than they realise once super and direct shares are added together.

•       What am I relying on them for? Income, growth, stability? Each of those can be affected differently by a change in valuation.

•       Would a fall in price change my plans? If the answer is yes, that’s worth knowing before it happens, not after.

Headlines, when a share price drops, tend to say the company is in trouble. Sometimes it is. But sometimes the business is fine and the price was simply high. Knowing the difference is what helps you stay calm when markets move.

Where to start

Not sure how much bank exposure you have across your super and personal investments? That’s something we can map out with you. Get in touch with the Funded Futures team to talk it through.

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