Australia's biggest banks are heading into a tougher fight for customer deposits, according to a new analysis from investment bank Jefferies. The firm warns that even as the pace of new lending slows, banks are likely to lend more than they can attract in new deposits, pushing a key measure of funding health—the loan-to-deposit ratio—higher.
That dynamic would force the country's major lenders to compete more aggressively for deposits, a shift that could squeeze their profit margins after a brief period of relief in the second half of fiscal 2026.
What Is the Loan-to-Deposit Ratio and Why Does It Matter?
The loan-to-deposit ratio (LDR) is a simple but important metric for banks. It compares the total value of loans a bank has made to the total deposits it holds from customers. A higher ratio means a bank is lending out a larger share of the money it has on hand. If the ratio climbs too high, the bank may need to find additional funding—often by raising deposit rates to attract more savers or by borrowing in wholesale markets.
For everyday investors, this matters because banks' funding costs directly affect their profitability. When banks have to pay more to attract deposits, their net interest margin—the difference between what they earn on loans and what they pay on deposits—tends to shrink. That can weigh on earnings and, ultimately, on share prices.
Why Jefferies Expects a Squeeze
Jefferies' view is based on a simple arithmetic problem: even if loan growth slows, it is still likely to outrun the pace at which new deposits flow into the banking system. That imbalance pushes the LDR upward, creating a need for banks to find more funding.
The firm notes that Australia's big banks enjoyed a brief tailwind in the second half of fiscal 2026, when deposit competition eased and funding costs dipped. But that window is closing. As LDRs rise, banks will likely need to offer higher interest rates on savings accounts and term deposits to attract and retain customer funds.
This is not a crisis scenario, but it does signal a return to a more competitive and potentially less profitable environment for Australia's largest lenders, which include Commonwealth Bank, Westpac, NAB, and ANZ.
What It Means for Investors
For investors holding shares in Australian banks, the Jefferies analysis suggests that the recent improvement in funding conditions may be short-lived. If deposit competition heats up, bank margins could come under pressure, making it harder for lenders to grow earnings at the pace investors have come to expect.
That said, slower credit growth is not necessarily bad news for the broader economy. It can signal that households and businesses are being more cautious about taking on debt, which can reduce the risk of a future credit crunch. But for bank shareholders, the combination of slower lending and higher funding costs is a headwind.
The analysis also highlights a broader theme in the Australian banking sector: the importance of deposit franchises. Banks with a strong base of low-cost, sticky deposits—such as those from everyday transaction accounts—are better positioned to weather a period of intense competition. Those that rely more on wholesale funding or higher-cost deposits may feel the squeeze more acutely.
Broader Context: A Shift in the Funding Landscape
The potential deposit squeeze comes at a time when Australian banks are also navigating other pressures. The Reserve Bank of Australia's interest rate decisions continue to influence the cost of funding and the demand for loans. Meanwhile, the broader economic backdrop—including inflation and household spending—shapes how much consumers and businesses borrow and save.
In recent years, Australian banks have benefited from a period of relatively stable funding costs and solid loan growth. But as the economic cycle turns, the dynamics are shifting. Jefferies' warning is a reminder that the banking sector's fortunes are closely tied to the ebb and flow of deposits, a factor that can sometimes be overlooked when investors focus on loan growth and asset quality.
For a sense of how global banking dynamics are playing out elsewhere, consider the recent UniCredit's buildup of a 47.6% stake in Commerzbank, which reflects a different kind of competitive pressure in European banking. Closer to home, the RBNZ's recent rate hike also had ripple effects on Australian stocks, underscoring how central bank policy shapes the environment for lenders.
What to Watch Next
Investors should keep an eye on the loan-to-deposit ratios reported by each of the major banks in their upcoming earnings releases. Any signs that these ratios are rising faster than expected could signal that the deposit squeeze is already underway.
Also worth watching are the interest rates banks offer on savings accounts and term deposits. If those rates start to climb, it will be a clear sign that competition for deposits is intensifying. Finally, commentary from bank management on funding costs and deposit growth will provide important clues about how the next few quarters are likely to unfold.
In the meantime, the Jefferies analysis serves as a useful reminder that even in a period of slower loan growth, banks are not necessarily out of the woods. The fight for deposits is a perennial challenge, and it looks set to become a bit more intense in the months ahead.
