(Bloomberg) -- Australian bank shares are headed for their biggest quarterly gain since 2021, a rally that may be tested in coming months as lower official interest rates weigh on the outlook for margins. 

The S&P/ASX 200 Finance Index is on track for an 11% gain, doubling the advance of the regional banking gauge over those three months. The nation’s biggest lender, Commonwealth Bank of Australia, this month touched a record high. 

Market pricing indicates the Reserve Bank of Australia will embark on reductions to the cash rate later this year, adding to pressure on net interest margins — a key gauge of bank profitability.

“Unless banks are able to hold back cash rate cuts from loans, in particular mortgages, net interest margins are likely to come under renewed pressure,” Carlos Cacho, chief economist at Jarden Australia Ltd., wrote in a report Wednesday. “Given the current ‘cost-of-living crisis’ and likely intense political focus on banks, we do not expect them to be able to hold back RBA cash rate cuts from mortgage rates, at least initially.”

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