Investing in ASX bank shares

What are ASX bank shares? 

A bank stock is a share in a financial institution that takes deposits and makes loans to individuals and businesses. In addition to those main activities, Australian banks are involved in many other aspects of the financial system, such as stockbroking, wealth management, and insurance. 

Banks serve a critical social need but have business models that are relatively simple to understand. In essence, banks make money by taking deposits and lending money, profiting from the difference in interest rates. 

Why invest in them? 

Bank shares can be rewarding long-term investments, especially for investors seeking passive income. Australian bank shares have a long history of paying attractive dividends, especially when the economy is firing. 

However, bank shares can be sensitive to economic cycles and fluctuations in interest rates. Banks rely on people being willing to spend and borrow money. And people are more inclined to take on loans and splash their cash when the economy is flourishing. 

When a recession arises, consumers and businesses tend to rein in spending, and some may encounter problems paying existing debts. This can result in losses for banks. Banks are, therefore, cyclical businesses. 

Interest rates can also impact a bank's profitability — falling interest rates can negatively impact profit margins, while we generally see rising interest rates as a positive. However, the correlation is not exact. 

Top bank stocks on the ASX

Of the 17 banks listed on the ASX, here are the top three ranked by market capitalisation from higher to lower.

Commonwealth Bank of Australia 

Australia's largest bank by market capitalisation, CBA provides banking services to retail, SME, and institutional clients, as well as delivering superannuation, insurance, and share trading products and services. 

As of February 13, 2025, the Commonwealth Bank of Australia (CBA) reported a cash net profit after tax (NPAT) of $5.13 billion for the half-year ending December 31, 2024, reflecting a 2% year-on-year increase. The bank declared an interim dividend of $2.25 per share, fully franked, a 5% rise from the previous year. Net interest margin (NIM) improved to 2.08%, while operating income grew 4% to $14.1 billion, supported by strong lending and deposit growth. 

In 2025, CBA is prioritizing technology investment, allocating $1.1 billion in the last six months of 2024 and projecting annual spending of $2.2 billion, focusing on AI and digital infrastructure. The bank has pledged to keep all regional branches operational until at least July 31, 2027, reinforcing its commitment to rural communities. Additionally, it is expanding its Career Comeback program to attract diverse talent across multiple sectors, strengthening its workforce and future growth prospects.

National Australia Bank Ltd

Founded in 1858 as the National Bank of Australasia, NAB's modern incarnation can be traced to the merger with the Commercial Banking Company of Sydney in 1982. Since then, NAB has become Australia's most prominent business bank. It provides business lending services, personal and home lending, wealth management, investment banking, and stock market investment platforms. 

As of February 13, 2025, NAB has reported its financial performance for the fiscal year ending September 30, 2024. The bank's cash earnings were $7.1 billion, reflecting an 8.1% decrease from the previous year, primarily due to heightened competition in the home lending sector. Despite these challenges, NAB declared a final dividend of 85 cents per share, bringing the total dividends for the year to $1.69 per share.

NAB is also reportedly considering the acquisition of Scottish Pacific, a non-bank lender specializing in trade, asset, and invoice finance, as part of its growth strategy.

ANZ Group Holdings

One of the top 100 banks in the world by market capitalisation, ANZ can trace its history back 186 years. It opened as the Bank of Australasia in Sydney in 1835 and in Melbourne in 1838. Since then, it has merged with 15 other banks, bought and sold assets and built its business with its customers. Most recently, ANZ implemented a scheme of arrangement to separate its banking and non-banking businesses, following which it sold off its share investing and investment lending businesses. 

As of November 7, 2024, ANZ Group Holdings Limited reported annual cash earnings of A$6.73 billion, a decrease from A$7.41 billion the previous year, primarily due to intense competition in home lending and deposits, as well as elevated operational costs. Reflecting these challenges, ANZ reduced its final dividend to 83 Australian cents per share, down from 94 cents the prior year.

In response to these market conditions, ANZ is investing A$2.5 billion in technological transformations, including the development of ANZ Plus and the Transactive Global system, aiming to enhance efficiency and customer experience. Additionally, ANZ has announced that Nuno Matos, former CEO of HSBC Wealth and Personal Banking, will assume the role of CEO in July 2025, bringing extensive experience in retail and commercial banking to guide the bank through its strategic initiatives.

Westpac Banking Corporation

Westpac Banking Corporation is one of Australia's leading financial institutions, offering a comprehensive range of services including personal and business banking, wealth management, and institutional banking. Established in 1817 as the Bank of New South Wales, it holds the distinction of being Australia's first bank. Today, Westpac operates a network of branches and ATMs across Australia and New Zealand, serving millions of customers.

In the fiscal year ending September 30, 2024, Westpac reported a net profit of A$6.99 billion, a 3% decrease from the previous year. This decline was primarily due to increased operating expenses, which rose by 7% owing to inflationary pressures and significant investments in technology. Despite these challenges, the bank's net interest margin improved to 1.97%, reflecting better loan repayment rates. The final dividend was increased to 76 Australian cents per share, and an additional A$1 billion was allocated to the share buyback program.

Looking ahead to 2025, under the leadership of incoming CEO Anthony Miller, Westpac plans to focus on simplifying operations and enhancing customer relationships. A key initiative is the unification of the bank's fragmented technology platforms to streamline processes and reduce costs. This strategy aims to balance digital innovation with personalized customer service, ensuring efficient and effective banking experiences.

What to look for when buying ASX bank shares 

As bank stocks account for a significant proportion of the S&P/ASX 50 Index (ASX: XFL), one might argue that a well-diversified portfolio should include some allocation to the banking sector. 

When investing in the banking sector, Australian investors can buy shares in individual banks directly or utilise an exchange-traded fund (ETF) with broad exposure to the sector. Investors should note that any ASX index ETF will include an allocation to financial shares, including ASX bank shares. 

Dividend investors find Australian banks particularly attractive due to their history of paying dividends to shareholders. The dividend yield is one criterion investors consider when choosing which bank shares to invest in. The dividend yield is the percentage of that share's current market price paid out in yearly dividends. All things being equal, a higher dividend yield will be preferable to a lower yield. 

Other key profitability metrics applicable to banks include return on equity (ROE), return on assets (ROA), and net interest margin (NIM). Return on assets is the percentage of net income a company makes relative to its total assets. NIM measures the difference between the interest income generated by banks and the value of interest they pay to their lenders (for example, interest on deposits) relative to the value of their (interest-earning) assets.

These metrics can indicate how profitable a bank is and can be used to compare different banks against each other. 

Pros of investing in ASX bank shares 

Stability and substantial volumes: After the economic disruption of the COVID-19 pandemic, bank profits are returning to pre-COVID levels thanks to continued substantial volumes in mortgage and business lending. A level of stability has returned to the sector. 

Rate rises support margins: The increase in the cash rate that has taken place in FY22-23 should support a recovery in net interest margins. 

Size: The big four banks – Commonwealth Bank, NAB, ANZ, and Westpac Banking Corp (ASX: WBC) – dominate the Australian banking industry. Between them, they held a whopping $1.87 trillion in home loans in 2022.¹ 

And the cons

Uncertain economy: Given increasing inflationary pressures and geopolitical tensions, the economic outlook is uncertain. As the Reserve Bank of Australia lifts the cash rate in response to rising inflation, the banks pass these rises to borrowers. 

Benefits of rate rises dampened: A higher mix of fixed-rate loans in back books and steepening yield curves may dampen the benefits of rising rates for banks. This correlates to increased mortgage distress and softening house prices. 

Slowed lending: Having divested non-core businesses, the major Australian banks are now more dependent on mortgage and business lending, which may slow down due to higher interest rates. 

Are ASX bank stocks a good investment? 

Whether bank shares are a good investment for you will depend on your financial situation and investment strategy. Bank stocks are some of the largest companies on the ASX by market capitalisation and are known for paying consistent dividends.  

The most recent financial results from ASX banks have been positive, but investors should understand that investing in banking shares is not without risks. If in doubt, seek financial advice that takes into account your personal circumstances.

Increasing inflation may put pressure on profit margins.  Central bank rate hike decisions should lead to increased profitability over the medium term but may be a double-edged sword – while they allow banks to charge more for loans, they may also slow growth in lending and could impact asset quality.