In the pessimistic scenario at Morgan Stanley, the valuation of the Australian banking industry will lose one-third.

Morgan Stanley analysts stated that if interest rates rise and inflation rears its head again, causing severe impacts on consumers and businesses, the value of the Australian banking sector could fall by about a third from current levels. Their pessimistic scenario includes: loan growth slowing to low single digits, profit margins decreasing by a moderate single-digit percentage point, and loan loss rates rising to 15-20 basis points. This pessimistic scenario would result in a 17% decrease in earnings for the 2027 fiscal year compared to Morgan Stanley's base scenario. Valuation multiples would be reduced; Morgan Stanley's target price for the four major Australian banks would be on average 32% lower than the current stock price.