International bank stocks are crushing the Big Four. Is it time to switch sides?

For years, Australian investors have looked overseas for growth in technology, consumer goods and luxury brands - but seldom considered international banks.

That's understandable. Australian lenders have earned a reputation for dividends and stability, while many of their global peers became poster children for the Global Financial Crisis.

Today, however, the picture looks very different. International banks have rebuilt their balance sheets, strengthened risk management and diversified into higher-growth businesses including payments, capital markets and wealth management.

Australia's Big Four took a different path. They simplified, exited adjacent businesses and doubled down on home lending - a mature market now facing fresh headwinds following the Federal Budget's tax changes.

And with that, the performance pendulum appears to be swinging away from Australia's Big Four. From Wall Street to Tokyo, international bank stocks are soaring to new highs, supported by stronger earnings, attractive valuations and rising dividends, while Australia's major lenders have been left behind.

Is it time for investors to look overseas for their financials exposure? Betashares Investment Strategist Tom Wickenden explores the case for owning high-quality global banks alongside Australia's Big Four.

Why have global banks outperformed Australia's Big Four?

Tom Wickenden: Over the past year the Betashares Global Banks ETF (ASX: BNKS) has returned about 43.4%, against 1.4% for Betashares Australian Financials ETF (ASX: QFN), and over five years returned 18.6% p.a. versus about 11.8% for QFN (net of fees, to 30 June 2026).

The core reason is earnings. Global banks are growing profits at close to double the Australian pace, and analysts keep upgrading offshore while trimming expectations at home, so the gap is widening rather than closing.

Australia's major banks are largely leveraged to a mature mortgage market where fierce competition has competed away much of the margin benefit.

Global banks, by contrast, have much more diversified earnings bases. 

In the United States, the large banks' capital markets businesses have just delivered one of their strongest quarters on record.

JPMorgan posted the highest quarterly profit in American banking history, while Goldman Sachs and Morgan Stanley lifted profits by around 80% and 58% respectively from a year earlier.

European banks have also enjoyed a significant turnaround, benefiting from wider margins and industry consolidation after delivering a record year in 2025. Meanwhile, Japan's banking sector has been transformed by the Bank of Japan's exit from negative interest rates and corporate governance reforms.

The net result is that global banks are delivering stronger, more diversified earnings growth than their Australian counterparts.

Australian banks were once viewed as the world's gold standard, while overseas banks carried the stigma of the GFC. Has that relationship flipped?

Tom Wickenden: Largely yes, although it's important to distinguish between investment appeal and financial safety. Australia's banks remain among the soundest in the world. What's changed is that they have become the more expensive, lower-growth option rather than the clear standout.

Since the GFC, international banks have done the heavy lifting on their balance sheets. US banks have nearly doubled their Common Equity Tier 1 capital and now comfortably pass the Federal Reserve's annual stress tests. European banks have rebuilt CET1 ratios to around 16%, meaning the "risky offshore bank" of 2010 is now generally very well capitalised.

They've also transformed their business models. Rather than relying primarily on traditional lending, many have expanded profitable fee-based businesses including investment banking, trading, wealth management and payments. That's a major reason why the US banking giants continue to post record profits.

Australia has largely moved in the opposite direction. 

Housing now accounts for around 60% of the major banks' loan books. 

Mortgage growth has slowed to low single digits, competition has compressed margins and there are fewer obvious avenues for diversification without taking on additional risk.

How do Australia, North America, Europe and Japan compare today on valuations, capital strength and earnings growth?

Tom Wickenden: The chart below shows Australian financials are generally the most expensive major banking market despite being one of the slowest growing.

They currently trade on around 2.1 times forward book value and 17.9 times forward earnings, with forecast earnings growth of approximately 5.7%.

By comparison, global financials trade on around 1.8 times book value and 12.8 times forward earnings while growing earnings at roughly 10.3% - close to double Australia's pace.

Within that, US banks trade on similar book value multiples to Australia but significantly cheaper earnings multiples while still delivering close to 10.6% earnings growth.

Europe remains the cheapest major banking region at around 1.5 times book value and 10.6 times earnings, while also offering the fastest expected earnings growth at roughly 11.8%.

Japan’s megabanks have re-rated from around half of book value a couple of years ago to somewhere near 1.0-1.5x today, still cheap against record combined profits of about ¥3.9 trillion for the year to March 2026, up roughly 25%.

From a capital perspective, there is now very little separating the major banking systems.

The net picture is consistent across valuations, capital and earnings: Australia is the most expensive and slowest growing, no better capitalised on a like-for-like basis, while North America, Europe and Japan offer stronger, more diversified earnings growth at cheaper prices.

Australian investors love the Big Four for their dividend yields and franking credits. Why shouldn't investors focus solely on today's yield?

Tom Wickenden: It comes down to starting yield versus total return and income growth.

The Big Four offer a high, largely franked yield today, which is valuable to Australian investors, but it comes from more expensive, slow-growing banks with limited earnings growth.

Global banks return a large and growing share of profits through buybacks as well as dividends, which lift per-share value and future dividends rather than showing up in today’s yield.

The growth side is where international banks stand out: US banks have just raised dividends again (Goldman about 11%, Morgan Stanley about 15%, Citi about 12%) alongside tens of billions of dollars in fresh buybacks, and Canadian banks carry a multi-decade record of steady dividend increases.

Japan is the clearest case of fast growth from a low base, with the three megabanks set to pay more than ¥2 trillion in dividends for the first time ever this fiscal year, on record profits and rising payout targets of around 40%.

So there is a trade-off between a high, but slow-growing franked yield, and a lower starting yield attached to faster earnings growth, rising payout ratios and buybacks that can compound into more income and capital over time. 

Franking is a genuine benefit, but only on the domestic portion, and it does not close a much larger growth and valuation gap.

The more useful lens for investors to consider is total shareholder return and the trajectory of income over the years ahead, rather than the starting yield in isolation.

Most Australians already own plenty of bank shares through their super and the ASX 200. Where do global banks fit in a portfolio today?

Tom Wickenden: The starting point is recognising that most Australians are already heavily exposed to domestic banks.

Through their super, direct holdings and the index itself, most Australians already carry heavy exposure to the Big Four, with financials making up about a third of the ASX 200.

The real question isn't whether investors should own banks - it's whether they're too concentrated in one banking system.

Global banks can play the role of a diversifier by providing exposure to many of the world's largest financial institutions across the United States, Europe, Japan and Canada. 

These businesses have more diversified earnings streams and, in the case of BNKS, the currency exposure is hedged, making it a cleaner investment in the banks themselves rather than a view on the Australian dollar.

Adding global banks alongside existing Australian exposure can improve their banking allocation's growth profile, diversify earnings sources and reduce reliance on Australia's housing market.

Every investor's circumstances are different, so I wouldn't prescribe a specific allocation. However, I'd argue that the vast majority of Australian investors would likely benefit from greater exposure to global banks than they currently have.

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