Credit Update: Commonwealth Bank of Australia –High-Quality Defensive Credit with Pickup (4.7%–6.2%)

Highlight

• Resilient Australian Mortgage Market: Support by sound borrower fundamentals, tighter underwriting, and a resilient labour market, which combined help cushion the impact of rising interest rates despite a more challenging environment.

• Stable Profitability Growth: CBA continues to deliver stable earnings, driven by higher net interest income and solid loan growth, which partially offsets ongoing net interest margin compression.  

• Robust Asset Quality: Supported by low arrears, an improving NPL ratio (1.01%), and strong borrower equity (LTV ~41%), providing a meaningful buffer against property market stress.

• Robust Capital and Liquidity Metrics: CET1 ratio of 12.3% and NSFR of 117% remain well above regulatory requirements and peer averages, indicating a strong capital buffer and stable long-term funding profile that supports resilience under stress scenarios.  

• Recommendation: Investors may consider AUD and USD senior unsecured and Tier 2 bonds, offering attractive yields in the range of 4.7% to 6.2%.

About Australia’s Largest Banking Group

Commonwealth Bank of Australia (CBA) is the largest banking group in Australia, with a market capitalisation of AUD 259 billion as of 15 April 2026. It has a dominant franchise in retail banking, supported by leading positions in residential mortgages and household deposits.

CBA business model is diversified across five principal segments: Retail Banking Services (RBS), Business Banking, Institutional Banking and Markets (IB&M), New Zealand (ASB), and Corporate Centre and Other. Although the group maintains operations in Australia, New Zealand, Asia, the United States, and the United Kingdom, its earnings are predominantly driven by the core Australian retail segment, which remains the primary driver of profitability.

As of December 2025, the bank held top market shares in Australia for home loans (25.4%), credit cards (28.1%), and household deposits (26.6%).

Australia Mortgage Market

In 2026, the Reserve Bank of Australia (RBA) shifted from the easing cycle seen in 2025 to a tightening stance, implementing a 25-basis-point rate hikes in both February and March that raised the cash rate from 3.60% to 4.10% in an effort to contain inflation. Looking forward, we expect the RBA to deliver a further one to two further hikes over the remainder of 2026, if inflationary pressures remain persistent, particularly from elevated oil prices.

Rising interest are expected to dampen overall household borrowing capacity, leading to softer demand from first-home buyers and investors relative to the recovery observed in 2025 (as highlighted in Australian Big 4 Bank Bonds: Capture Attractive Yields with Top-Tier Credit Quality. At the same time, higher borrowing costs also exerts additional pressure on highly indebted borrowers, increasing their exposure to potential credit deterioration.

Despite these headwinds, the Australian Prudential Regulation Authority (APRA), in February 2026, implemented a 20% cap on high debt-to-income (DTI) lending (>6x), tightening underwriting standards by limiting riskier loans. This measure may modestly slow credit growth; however, it strengthens asset quality and reduces systemic risk—broadly positive for mortgage-heavy lenders such as CBA, supporting more stable credit performance despite some pressure on higher rate loan volumes.

Encouragingly, underlying borrower fundamentals remain sound. According to the APRA, key asset quality indicators for Authorised Deposit-taking Institutions (ADIs) continue to improve (Chart 1). Short-Term Arrears (30–89 days past due) has dropped from 0.59% (Dec ’24) to 0.47% (Dec’ 25) which serves as an early sign that fewer households are experiencing short-term mortgage stress. Furthermore, non-performing loans (90+ days) decreased from 1.05% to 0.99% over the same period, suggesting that severe defaults are shrinking and remains historically very low.

In addition, the proportion of loans with loan-to-valuation ratios (LVR) above 80% fell slightly from 17.4% into 16.9% in the same period. A decline in this metric indicates lower risk to lenders and an improved borrower equity positions which provides a better financial buffer if house prices fall.

Chart 1: Australian Authorised Deposit-taking Institution Residential Mortgage Risk Indicators

At the same time, Australia’s labour market conditions remain supportive, with the unemployment rate at 4.3% in February 2026, below the pre-pandemic annual average of 5.2%. (Chart 2) Job vacancies also rose to 337,900 in February 2026, up from 329,000 in November 2025, and remain well above the pre-pandemic average of 226,000. (Chart 3) This reflects resilient employment conditions, which underpin household income stability and help contain mortgage credit risk.

Overall, Australia’s housing market is expected to moderate in 2026 given higher interest rates and macro uncertainty. Nonetheless, the combination of a tightens underwriting, sound borrower fundamentals and resilience labour market condition should help cushion and limit the extent of any potential downturn.

Chart 2: Australia’s unemployment level

Chart 3: Australia’s Job vacancies

Robust Loan Growth Offsets Net Interest Margin Compression

As shown in Table 1, CBA delivered a solid 1HFY26 performance (as of December 2025), supported by continued balance sheet expansion. Net interest income increased by 6.4% YoY to AUD $12.7 billion. Gross loans and acceptances rose by 7.3% YoY, while average interest-earning assets grew by 8.5% YoY, reflecting sustained lending momentum.

However, net interest margin (NIM) declined by 1.9% YoY to 2.04%, primarily due to higher funding costs and increased competition. Average interest-bearing liabilities expanded by 9.3%, outpacing asset growth. As a result, earnings growth remained largely volume-driven, with the gains from asset growth partially offsetting margin compression.

Non-interest income rose by 6.5% YoY, supported by a 16% increase in trading income to AUD $603 million, driven by stronger performance in the Markets division and favourable derivative valuation adjustments. Meanwhile, the cost-to-income ratio increased slightly from 45.2% to 46.0%, mainly due to higher staff costs and continued investment in technology.

Finance costs declined by 5.2% YoY to AUD $19.7 billion, primarily reflecting the Reserve Bank of Australia’s cumulative 75 basis points cash rate reduction throughout 2025, which lowered funding expenses. Impairment losses remained stable at AUD $0.32 billion, as improved business credit quality offset higher collective provisioning for global macroeconomic uncertainties. Overall, CBA’s 1HFY26 results highlight resilient underlying performance, with robust loan growth despite modest margin pressures.

Table 1: CBA Financial Highlight

Solid Asset Quality Supported by Robust Capital and Liquidity

CBA maintains a dominant position in Australian housing finance, accounting for 25% of the mortgage market and 71% of its domestic loan book. Despite this concentration, borrower resilience remains strong, with Loan-to-Value Ratios at 41.3%, below the five-year average of 44.4%, providing a solid collateral buffer against potential property market corrections.

Asset quality remained resilient in 1HFY26, with the non-performing loan (NPL) ratio improving to 1.01% from 1.16% in 1HFY25, supported by portfolio growth, net credit upgrades, and refinancing activity. Although this is slightly above the five-year average NPL level of 0.93%, it remains at a manageable level. Stage 3 exposures also declined, further reinforcing underlying credit quality.

Although provisions increased modestly to AUD 6.34 billion (1HFY25: AUD 6.23 billion), this reflects a prudent approach to maintaining strong balance sheet buffers amid macroeconomic uncertainty. CBA also retains an approximately AUD 2.8 billion buffer above expected losses under its central scenario. This conservative posture is reflected in a provision coverage ratio of 1.55%, which, despite a slight decrease from 1.62% in 1HFY25 due to higher credit risk-weighted assets (RWA), continues to provide a significant cushion against potential future volatility. 

Capital and liquidity positions remain robust. The CET1 ratio rose slightly to 12.3%, comfortably above APRA’s minimum requirement of 10.25% and the bank’s 11% target, supported by earnings, partly offset by dividends and higher RWA. Liquidity metrics also stayed robust, with Net Stable Funding Ratio (NSFR) and Liquidity Coverage Ratio (LCR) at 117% and 132% respectively, well above regulatory thresholds, with a AUD 48 billion LCR surplus.

Funding remains stable, anchored by a strong deposit base, which accounts for 79% of total funding. This is supported by strong customer primacy, including a 33.5% retail main financial institution (MFI) share, meaning around one in three Australians regard CBA as their primary bank, as well as deep ecosystem integration that enhances deposit stickiness. As a result, CBA benefits from a structural funding surplus, reflected in a record deposit-to-loan ratio of 91.9% (1HFY25: 90.1%). Wholesale funding is well laddered, with a stable weighted average maturity (WAM) of around 5.2 years and no concentration in any single period, reducing rollover risk and strengthening resilience under uncertain interest rate environment.

How CBA fare against other Australian banking giants

Relative to its peer, CBA distinguishes itself with a robust capital and funding profile, reporting a high CET1 and an NSFR ratio, both at or in line with peer levels. This reflects a strong capital buffer and stable funding base, reinforcing its resilience under potential stress scenarios. Overall, CBA’s balance sheet metrics highlight in strength in capital and funding management, positioning it favourably among the Big Four banks. 

Table 2: Peer Comparison

Key risk

Interest Rate Risk: While higher rates may increase net interest margin through repricing, but increase funding costs and borrower stress, potentially slowing loan growth and increasing credit risk.

Housing Market Risk: High exposure to Australian mortgages means a sharp property correction could reduce collateral values and raise potential loan losses.

Macroeconomic and External Shocks: Economic slowdown may affect household income, employment, and borrowing capacity, potentially worsening asset quality.

Recommendation

Overall, CBA’s dominant market position, solid capital and liquidity, and disciplined balance sheet management underpin its credit resilience. Combined with well-managed credit risk in the mortgage portfolio, the bank is well-positioned to maintain stable performance and navigate the current tightening cycle.

We recommend the following AUD senior unsecured bank bonds (Table 3), which offer compelling yields across short- to long-term tenors, ranging from 5.1% to 5.7%.

For investors seeking higher returns and willing to accept moderately higher risk, USD and AUD subordinated Tier 2 bonds from these banks present an attractive opportunity (Table 4), these instruments offer yields ranging from 4.7% to 6.2%.

It is important to note that Tier 2 bonds carry loss absorption risk, as their loss-absorbing features may be triggered in the event of a non-viability scenario. When assessing these instruments, both yield and years to call are key considerations. Under Basel III regulations, Tier 2 bonds not redeemed past their call date must be amortised, which encourages issuers to call and refresh their Tier 2 capital earlier.  

Table 3: CBA’s Senior Unsecured Bond

Table 4: CBA’s Tier 2 Bond