Australia’s four major banks are making crazy money!

The Australian capital market in February is destined to be shrouded in the golden halo of the banking industry.

As National Australia Bank (NAB) handed over its report card on Wednesday,The earnings season for Australia’s four major banks comes to a close with cheers。

The four financial giants added a combined market value of about A$72 billion during the earnings season, pushing the S&P ASX 200 index to an all-time high.

In this seemingly ordinary financial reporting season, what is the force that allows these lending institutions to buck the trend and deliver astonishing results of generally increasing cash income by more than 15%?

The market generally attributes this to cost control and efficiency improvements brought by AI, but this is only superficial.

The author believes that the deeper driving force isHidden in the interest rate curve that is undergoing structural changes。

To understand the bank’s better-than-expected performance in the first quarter, we first need to understand the bank’s profit model. Commercial banks essentially operate a “maturity mismatch” business.

theyUse short-term liabilities (savers’ deposits) to support long-term assets (home loans and business loans). This pattern of short-term financing makes banks extremely sensitive to the shape of the yield curve.

Looking back on 2025, the Reserve Bank of Australia has cut interest rates three times, bringing the cash rate down from highs.

The impact of interest rate cuts is not evenly distributed. From the second half of 2025 to the beginning of 2026,The market has seen a phenomenon that is extremely beneficial to banks:Short-term interest rates have fallen due to expectations and actual interest rate cuts, but long-term interest rates have remained strong or even increased due to inflation concerns and expectations of economic resilience.

According to a BlackRock report, although Australia’s 3-year government bond yields have fluctuated, the market’s expectations for policy interest rates have been repriced.The 10-year Treasury yield rose to around 4.8% at the end of the fourth quarter of last year。

This pattern of sinking short-end and rising long-end directly causes the entire yield curve to become steeper. For banks, a steep yield curve is the optimal operating environment.

They can take in short-term deposits at lower cost (because short-term interest rates are low) while making long-term loans at higher interest rates (because long-term interest rates are high).Net interest margin (NIM), the core indicator of bank profitabilitywas quietly amplified in the process.

NAB’s financial results confirmed this: its net interest margin rose 2 basis points to 1.8%, which the bank attributed to “improved returns on the deposit replication portfolio”.

ANZ’s net interest margin also rose 2 basis points to 1.56%.

A seemingly small change in basis points, multiplied by tens of billions of Australian dollars in interest-earning assets, turned into an astonishing profit increase——NAB cash earnings increased 16% year-on-year to A$2.02 billion。

The steepening of the interest rate curve not only improves banks’ marginal returns, but also stimulates the release of credit demand. In the field of business loans, as Australia’s largest business lender, NAB’sCommercial banking quarterly transaction volume increased by 7%, and the commercial and private banking segment also increased by 3%。

Companies took advantage of the relatively stable interest rate environment to increase investment, and private investment such as machinery and equipment spending and data center construction performed strongly in the fourth quarter of last year.

The delayed effects of interest rate cuts are beginning to show——The previous three interest rate cuts have eased the repayment pressure on borrowers, and the level of bad debts has been significantly lower than expected.

NAB recorded bad debts of A$170 million, well below the A$248 million forecast by Citi analysts.Hitting second-lowest quarterly level since late 2024. Good asset quality means that banks do not need to set aside large amounts of bad debt provisions, and this part of profits can be released smoothly.

However, just as the market was cheering for this perfect report card, a dark cloud was quietly approaching.

On February 3, the Reserve Bank of Australia made a decision that caught many market participants off guard – to restart interest rate increases, raising the cash rate by 25 basis points to 3.85%. The driving force behind this is stubborn inflation, which accelerated to 3.4% in the second half of 2025. Cost pressure in the service industry and the tight job market forced the central bank to step on the brakes again.

This policy shiftis fundamentally changing the interest rate curve that benefits banks. When short-term interest rates rise rapidly due to interest rate increases, while long-term interest rates are difficult to rise simultaneously due to limited economic growth expectations, the entire yield curve will tend to flatten.

what does that mean?

For banks, a flattened curve is poison to profitability.

Their costs of absorbing deposits (short-term interest rates) are rising rapidly, while the returns they can earn from lending (long-term interest rates) are relatively stagnant.

The room for expansion of net interest margin will be quickly compressed. If competition on the deposit side intensifies,Banks have to raise deposit rates to retain customers(Just as Westpac added A$15 billion in domestic deposit hedges to stabilize funding costs), then interest rate spreads will face greater pressure.

Citi analysts have already smelled a hint of unease when commenting on NAB’s results. They pointed out,NAB’s common equity tier 1 capital adequacy ratio (CET1) fell from 11.6% to 11.48%is an “obvious negative factor” in this performance.

At the turning point of interest rates, the rate of capital consumption often indicates that future expansion capabilities are limited.

As the dust settles on the interest rate hike in February, the market expects that there may be further tightening actions during the year. The market has predicted that interest rates may be raised again in May.

If the inflation data continues to be high,It is not impossible for the cash rate to hit 4.1% before the end of the year。

For investors, the first-quarter earnings report is undoubtedly a feast. But the essence of this feast is largely a concentrated realization of the dividends of past interest rate cutting cycles and curve steepening.

When the central bank’s policy pendulum swings from “easing” to “tightening,” the profit logic of the banking sector is undergoing subtle and profound changes.

Entering the second quarter, the focus will shift from “how fast profits grow” to “how long the net interest margin can last.”

Asset quality will also face a real test – as the effect of interest rate hikes is transmitted, will the mortgage overdue rate rebound from lows? Will demand for business loans cool as financing costs rise?

Westpac noted that households and businesses showed resilience during the quarter,But how long this resilience can be maintained in an environment where interest rates continue to rise remains a question.。

After this historic surge in stock prices, it may be time to take your eyes out of the rearview mirror and stare ahead at the flatter interest rate curve. The banking playbook never changes—The interest rate of success, the interest rate of failure。

In the first quarter, they were the darlings of the steepening curve; in the second quarter, they will be baptized by the flattening of the curve. The applause of the earnings season has not completely dissipated, and the whistle of the next test has already sounded.

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