Credit Update: Westpac’s High-Quality Defensive Credit with Compelling Yield Pickup (4.7%–6.3%)

Highlight

• Banking Sector Resilient Amid Property Tax Reforms: Investor demand may soften and credit growth moderate, but the Australian banking sector remains supported by resilient mortgage fundamentals, strong borrower buffers, and continued owner-occupier demand.

• Stable Profitability Growth: WBC 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 (1.11%), and strong borrower equity (LTV ~48%), providing a meaningful buffer against property market stress.

• Robust Capital and Liquidity Metrics: CET1 ratio of 12.4% and LCR of 132% remain well above regulatory requirements and peer averages, indicating a strong capital buffer and stable liquidity 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 6.3%.

Overview

Westpac Banking Corporation (WBC) is one of Australia’s “Big Four” banks and the country’s second-largest bank by assets after Commonwealth Bank of Australia (CBA). As of 31 March 2026, WBC reported total assets of approximately AUD 1.1 trillion, while its market capitalisation stood at around AUD 132 billion as of 18 May 2026.

WBC is structured into five core divisions: Consumer, Business & Wealth, Institutional Banking, New Zealand, and Group Functions—allowing it to serve customers from individuals to large corporations. Despite having some international operations, the group’s earnings are predominantly driven by its core Australian retail banking segment, particularly residential mortgages, which remains the backbone of its profitability and reflects the bank’s strong domestic franchise.

Australia Mortgage Market

In 2026, the Reserve Bank of Australia (RBA) shifted from the easing cycle seen in 2025 to a tightening stance, implementing three 25-basis-point rate hikes in February, March, and May, raising the cash rate from 3.60% to 4.35% in an effort to contain inflation. If inflationary pressures remain persistent moving ahead due to elevated oil prices, we expect the RBA to deliver one further rate hike over the remainder of 2026.

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

For more insights into the Australian mortgage market, please look at Credit Update: Commonwealth Bank of Australia –High-Quality Defensive Credit with Pickup (4.7%–6.2%)

Australia’s 2026–27 Federal Budget Proposal Property Tax Reform

Australia’s proposed 2026–27 property tax reforms are expected to moderate investor demand in the established housing market, particularly among higher-income and leveraged investors who benefit most from negative gearing and CGT concessions. This could slow housing credit growth and create a mild earnings headwind for the Australian banking sector over the medium term.

However, the overall impact on the banking sector is expected to remain manageable. Grandfathering provisions, continued demand from owner-occupiers and first-home buyers, as well as incentives for new residential developments, should help support housing activity and partially offset softer investor lending demand.

In addition, the Big Four banks continue to maintain strong mortgage credit fundamentals, supported by low mortgage NPLs, prudent underwriting standards and healthy borrower equity. Overall, the reforms are more likely to drive a gradual housing market rebalancing rather than trigger a severe downturn, with the Australian banking sector expected to remain resilient.

For more insights into the Australian mortgage market, please look at Australia's Proposed Property Tax Reform: What Is the Impact on Australia's Banking Sector.

Robust Loan Growth Offsets Net Interest Margin Compression

As shown in Table 1, WBC delivered a solid 1HFY26 performance (as of March 2026), supported by continued loan expansion. Gross loans and acceptances rose by 7.3% YoY, while average interest-earning assets grew by 3.9% YoY, reflecting sustained lending momentum. This supported net interest income which increased by 4.5% YoY to AUD $9.8 billion.

However, net interest margin (NIM) declined by 3bps to 1.89%, primarily driven by tighter spreads amid intense lending competition. Higher deposit and wholesale funding costs, together with competitive loan pricing and a shift toward lower-yield lending products, likely offset the benefit from asset growth.

Non-interest income continues to remain supportive, rising by 5.5% YoY to AUD $1.5 billion, supported by a 30% increase in trading income to AUD $387 million, driven by higher markets rates and foreign exchange income. On balance, WBC’s cost-to-income ratio excluding notable items decreased slightly from 51.8% to 51.7%, driven by lower costs and stronger income, reflecting strong ongoing operational efficiency.

Finance costs declined by 11.7% YoY to AUD 16.5 billion, primarily driven by a lower average interest rate, which fell from 4.4% in 1HFY25 to 3.8% in 1HFY26.  Impairment losses have significantly increase 77.2% YoY to AUD $0.44 billion was not due to a broad wave of defaults, but rather a pre-emptive and disciplined adjustment to the bank's provisions to account for a more challenging and uncertain economic and geopolitical environment. Overall, WBC’s 1HFY26 results highlight resilient underlying performance, with robust loan growth despite modest margin pressures.

Table 1: WBC Financial Highlight

	1HFY25	1HFY26	Change
Net Interest Income (AUD $Billion)	9.35	9.77	+4.5%
Non-Interest income (AUD $Billion)	1.44	1.52	+5.5%
Net Interest Margin (%)	1.92%	1.89%	-3bps
Gross Loans and Acceptances (AUD $Billion)	829.39	890.26	+7.3%
Average Interest-Earning Assets (AUD $Billion)	996.70	1,035.23	+3.9%
Average Interest-Bearing Liabilities (AUD $Billion)	851.04	881.67	+3.6%
Source: Westpac Banking Corporation (WBC), iFAST compilations. Data as of 31 March 2026.

Asset Quality Remained Resilient Amid Macro Uncertainty

Asset quality remained resilient in 1HFY26, with the non-performing loan (NPL) ratio improving to 1.11% from 1.22% in 1HFY25 supported by 90+ day delinquencies declined to 0.65% from 0.86% YoY, reflecting improved borrower repayment capacity. Although this is slightly above the five-year average NPL level of 1.22%, it remains at a manageable level. Stage 3 exposures also declined, further reinforcing underlying credit quality.

WBC maintains a dominant position in Australian housing finance, accounting for 20% of the mortgage market and 60% of its domestic loan book. Despite this concentration, borrower resilience remains strong, with Loan-to-Value Ratios at 48%, below the five-year average of 49.2%, providing a solid collateral buffer against potential property market corrections.

Although total provisions for expected credit losses increased to AUD 5.20 billion (1HFY25: AUD 5.07 billion), this reflects a prudent approach to maintaining strong balance sheet buffers amid global uncertainty. WBC also retains an approximately AUD 1.9 billion buffer above expected losses under its base case scenario. This conservative posture is reflected in a provision coverage ratio increase from 1.26% in 1HFY25 to 1.29% to 1HFY26 to provide a significant cushion against potential future volatility. 

Strong Capital, Liquidity and Funding Profile

WBC’s capital and liquidity positions remained robust in 1HFY26. The Common Equity Tier 1 (CET1) ratio increased to 12.4%, well above the minimum regulatory requirement of 10.25% and the bank’s post-dividend operating target of above 11.25%. The strong capital position was primarily supported by earnings generation (+74bps), although this was partially offset by dividend distributions (-57bps) and growth in Risk-Weighted Assets (RWA) (-31bps), reflecting ongoing loan expansion and balance sheet growth.

Liquidity metrics also remained resilient, with the Net Stable Funding Ratio (NSFR) at 112% and the Liquidity Coverage Ratio (LCR) at 132%, both well above regulatory minimum regulatory requirement of 100%. In addition, the bank maintained a substantial LCR surplus of approximately AUD $45 billion, providing a strong liquidity buffer against potential market stress and funding volatility.

Funding remains stable, anchored by a strong deposit base, with customer deposits accounting for 68% of total funding supported by consistent customer primacy, with a Main Financial Institution (MFI) share of 19% and Westpac maintained a solid customer deposit-to-loan ratio of 84.2% at 1HFY26. Wholesale funding is proactively managed, with the WBC raising AUD 24 billion in new long-term funding in the financial year to date to ensure balance sheet resilience against global uncertainty.

The bank’s term debt issuance is also well-diversified, with 54% having a tenor of greater than 5 years no concentration in any single period, reducing rollover risk and strengthening resilience under uncertain interest rate environment.

How WBC stand against other Australian banking giants

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

Table 3: Peer Comparison

	WBC	CBA	NAB	ANZ
Common Equity Tier 1 Ratio (CET1)*	12.4%	12.3%	11.7%	12.4%
CET1Above Minimum Requirement	+2.15%	+2.05%	+1.45%	+2.15%
Net Stable Funding Ratio (NSFR)**	112%	117%	116%	115%
Liquidity Coverage Ratio (LCR)**	132%	132%	132%	132%
* CET 1 minimum regulatory requirement is 10.25% ** NSFR and LCR minimum regulatory requirement is 100% Source: Company report, iFAST compilations. Data as of 31 December 2025 and 31 March 2026

Key risk

Interest Rate Risk: Higher rates may support net interest margin through repricing but could increase funding costs and borrower stress, potentially constraining loan growth and elevating credit risk. However, impacts are partly mitigated by strong collateral buffers and prudent underwriting.

Proposal Property Tax Reform Policy Risk: Housing policy reforms may moderate investor demand and slow mortgage growth, while high exposure to residential mortgages leaves WBC sensitive to property price corrections. Nevertheless, grandfathering provisions and resilient housing fundamentals should limit near-term impact.

Macroeconomic Risk: A broader economic slowdown could weaken household income and employment, pressuring borrowing capacity and asset quality. This is partly offset by WBC’s strong capital position and stable funding base.

Recommendation

Overall, WBC’s dominant market position, strong capital and liquidity buffers, and disciplined balance sheet management underpin its credit resilience. Together with well-managed credit risk in its mortgage portfolio, the bank is well-positioned to navigate the current tightening cycle and upcoming property tax reforms.

We recommend the following USD and AUD senior unsecured bank bonds in Table 3, which offer compelling yields across medium- to long-term tenors, ranging from 4.7% 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 5.5% to 6.3%.

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.  

Among the Tier 2 subordinated bonds, we favour WSTP 6.934% 23Jun2038 Corp (AUD) and WSTP 5.815% 04Jun2040 Corp (AUD), which currently offer attractive yields above 6%, in line with our preference for longer-duration bonds.

Table 3: WBC’s Senior Unsecured Bond

Bond name	Ask Price	Year to Maturity	Yield to Maturity	Min / Sub investment amount	Credit Rating (Fitch)
WSTP 5.005% 31Mar2031 Corp (USD)	101.20	4.8	4.7%	USD 100,000/100,000	N.R.
WSTP 5.141% 12Feb2031 Corp (AUD)	99.67	4.7	5.2%	AUD 10,000/10,000	AA-
WSTP 4.040% 08Aug2033 Corp (AUD)	90.24	7.2	5.7%	AUD 200,000/2,000	N.R.
Source: Bondsupermart, iFAST Compilations. Data as of 28 May 2026

Table 4: WBC’s Tier 2 Bond

Bond name	Ask Price	Year to Call/Maturity	Yield to Call/Maturity	Min / Sub investment amount	Credit Rating (Fitch)
WSTP 5.618% 20Nov2035 Corp (USD)	101.07	8.5/9.5	5.4%/5.4%	USD 2,000/1,000	A-
WSTP 5.972% 10Jul2034 Corp (AUD)	100.85	3.1/8.1	5.6%/5.9%	AUD100,000/100,000	A-
WSTP 6.934% 23Jun2038 Corp (AUD)	104.76	7.1/12.1	6.1%/6.4%	AUD100,000/100,000	N.R.
WSTP 5.815% 04Jun2040 Corp (AUD)	96.79	9.0/ 14.0	6.3%/6.3%	AUD10,000/10,000	A-
Source: Bondsupermart, iFAST Compilations. Data as of 25 May 2026