Credit Update: ANZ – High-Quality Defensive Credit with Compelling Yield Pickup (5.0%–6.0%)

Highlight

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

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

• Stable Profitability Growth: ANZ 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 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 5.0% to 6.0%.

Overview

Australia and New Zealand Banking Group (ANZ) is one of Australia’s “Big Four” banks. As of 30 April 2026, ANZ reported total assets of approximately AUD 760 billion while its market capitalisation stood at around AUD 110 billion as of 23 June 2026.

ANZ is structured into seven core divisions: Australia Retail, Business & Private Bank, Institutional, New Zealand, Suncorp Bank, Pacific, and Group Centre. While residential mortgages remain the "backbone" of the bank's balance sheet—representing 40% of total Group assets—earnings are highly diversified across its footprint.

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 more rate hike in 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.

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, healthy borrower equity, and rising household savings buffers. 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 Australia proposal property tax Reform, please look at Australia's Proposed Property Tax Reform: What Is the Impact on Australia's Banking Sector.

ANZ’s Resilient 1HFY26 Performance Amid Economic Uncertainty

As shown in Table 1, ANZ delivered a stable 1HFY26 performance (as of March 2026), with gross loans and acceptances remaining flat, while average interest-earning assets grew by 2.2% year-on-year. This contributed to a slight 0.2% YoY increase in net interest income to AUD $8.89 billion.

ANZ’s net interest margin (NIM) declined by 3 basis points YoY to 1.53%, driven by intense asset pricing competition. Non-interest income increased by 8.9% YoY to $2.3 billion, supported by higher realised gains on economic hedges at the group level (bank earned from matured or closed-out derivative contracts used to protect its earnings against fluctuations in foreign exchange rates and interest rates). Meanwhile, the cost-to-income ratio improved from 52.2% to 49.4%, reflecting disciplined cost management and ongoing operational efficiency.

Finance costs declined by 15.9% YoY to AUD 20.1 billion, primarily driven by a lower average interest rate, which fell from 4.6% in 1H25 to 3.8% in 1H26. Total credit impairment charges increased by 89% YoY to $274 million, including a collective provision charge of AUD $175 million to account for heightened downside risks related to the Middle East conflict, partially offset by underlying credit quality improvements. Overall, ANZ’s 1HFY26 results highlight a resilient underlying performance and operational efficiency, offset by modest margin pressure.

Table 1: ANZ Financial Highlight

Asset Quality Remained Resilient Amid Macro Uncertainty

Asset quality remained resilient in 1HFY26, with the non-performing loan (NPL) ratio has slightly increase to 0.96% driven by the impairment of a small number of single-name customers is reflected stage 3 exposure has increase. While the NPL is slightly above the five-year average level of 0.92 %, it remains at a manageable level in our view.  

ANZ maintains a dominant position in Australian housing finance, accounting for 13.2% of the mortgage market and 49% of its domestic loan book. Despite this concentration, borrower resilience remains strong, with Loan-to-Value Ratios at 39%, below the five-year average of 42.8%, providing a larger collateral buffer against potential property market corrections.

Although total provisions for expected credit losses increased to AUD $4.85 billion (1HFY25: AUD $4.64 billion), this reflects a prudent approach to maintain a strong balance sheet amid global uncertainty. ANZ also retains an approximately AUD $2.0 billion buffer above expected losses under its 100% base case scenario. This conservative posture is reflected in a provision coverage ratio increase from 1.23% in 1HFY25 to 1.32% to 1HFY26 continues to provide a significant cushion against potential future volatility. 

Strong Capital and Liquidity Profile

ANZ’s capital and liquidity positions remained robust in 1HFY26. The Common Equity Tier 1 (CET1) ratio increased to 12.4%, well above regulatory minimum requirements of 10.25%. The strong capital position was primarily supported by earnings generation (+81 bps) and the reinvestment of surplus capital (+22 bps), which were partially offset by dividend distributions (-33 bps) and underlying RWA growth (-19 bps).

Liquidity metrics also remained resilient, with the Net Stable Funding Ratio (NSFR) at 115% and the average Liquidity Coverage Ratio (LCR) at 132%, both well above the regulatory minimum requirement of 100%. ANZ’s wholesale funding maturities are more concentrated in FY27, FY28, and FY29; however, the bank maintains a substantial LCR surplus of approximately AUD $75 billion, providing a strong liquidity buffer and funding resilience.

How ANZ stand against other Australian banking giants

Relative to its peer, ANZ distinguishes itself with a robust capital and liquidity profile, reporting a high CET1 and an LCR ratio, both at and in line with peer levels. This reflects a strong capital buffer and liquidity 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: 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 ANZ 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 ANZ’s strong capital position and stable funding base.

Recommendation

Overall, ANZ’s dominant market position, strong funding 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 AUD senior unsecured bank bonds (Table 3), which offer compelling yields of 5.0%

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 5.4% to 6.0%.

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: ANZ’s Senior Unsecured Bond

Table 4: ANZ’s Tier 2 Bond