Australian Big 4 Bank Bonds: Capture Attractive Yields with Top-Tier Credit Quality

Highlight

• Strong Market Position: The Big Four banks dominate Australia’s banking sector, supported by the RBA’s 2025 rate cuts (three 25bps cuts in February, May and August) and ongoing government support, which should sustain housing loan demand.
• Policy Support for Housing: Reforms to negative gearing, stamp duty concessions, and first-home buyer incentives continue to underpin housing demand, supporting banks’ mortgage cash flows.
• Stable Profitability Growth: Big Four banks reported improved 1H25 earnings, driven by higher net interest income and solid loan growth, ensuring stable capacity to service debt obligations.
• Robust Credit and Capital Profile: CET1 ratios and liquidity coverage remain strong, well above regulatory requirements, providing resilience for investors in bank bonds.
• Recommendation: Investors may consider AUD and USD Tier 2 bonds from the Big Four banks, offering attractive yields (4.7%–5.6%).

Overview

Australia’s banking sector is dominated by the “Big Four” banks: Commonwealth Bank of Australia (CBA), Westpac Banking Corporation (WBC), National Australia Bank (NAB), and Australia and New Zealand Banking Group (ANZ). As of 8 August 2025, they collectively hold around 70% of market share, with combined assets exceeding AUD $3.9 trillion, out of a total AUD $5.5 trillion in the national banking system show as table 1.

Table 1: Market Cap and Loan Portfolio in Australia

Commonwealth Bank of Australia (CBA)

Strong Earnings Momentum Amid Early Signs of Credit Stress

As shown in Chart 1, CBA reported a 4.6% YoY increase in net interest income to AUD $11.9B in 1H25 (as of 31 December 2024), driven by a 9 bps YoY improvement in net interest margin (NIM) to 2.08%. Non-interest income declined 0.5% YoY to AUD $2.2B. Loan growth remained solid at 5% YoY to AUD $974.8B, supported by a 5% increase in Australian housing loans and a 5% rise in business lending. This growth translated into higher operating income, lifting pre-provision income by 3.3% YoY to AUD $7.7B, as shown in Table 2.

Operating expenses increased 4.5% YoY, driven by higher staff expenses and ongoing investment in technology to pushing the cost-to-income ratio to 45.2% the lowest among major banks, highlighting CBA’s superior cost efficiency. Finance costs rose 14% YoY to AUD $20.7B, mainly due to higher deposit and wholesale funding costs, a trend affecting the sector.

Impairment losses fell 22.9% YoY to AUD $0.32B, with the loan-loss rate decrease 2 bps YoY to improving to 7 bps. This reflects disciplined credit origination, rising house prices, and reduced consumer finance losses. However, increases in Stage 2 and Stage 3 exposures point to emerging signs of asset quality pressure. Overall, net income rose 6.3% YoY to AUD $5.14B, maintaining CBA’s position as the most profitable of the major banks for 1H25.

Chart 1: CBA’s Revenue and Net Interest Margin Performance

Table 2: CBA’s Financial and Credit Performance

Strong Capital and Stable Funding Amid Higher Provisions

CBA increased loan impairment provisions to AUD $6.23B in 1H25 (1H24: AUD 6.06B), reflecting inflationary pressures and higher interest rates. The provision coverage ratio declined by 2 bps YoY to 1.62%, driven by growth in credit risk-weighted assets. Nonetheless, CBA maintained a strong and peer-leading provision coverage position.

CBA’s CET1 capital ratio stood at 12.2% in 1H25, among the strongest in the sector, comfortably above APRA’s 10.25% minimum and the bank’s 11% long-term target. This ratio incorporates the impact of dividend payments and the partial completion of its AUD $1.0B on-market share buyback (AUD $300M completed in 1H25). The remaining AUD $700M is expected to reduce CET1 further by approximately 15 bps to 12.05%, but the bank will still maintain a substantial buffer to support growth and absorb shocks.

High-quality liquid assets (HQLA) fell 6% YoY to AUD $175.3B, reflecting lower cash inflows, repayment of RBA Term Funding Facility borrowings, and redeployment into lending. This led to a slight decline in the deposit-to-loan ratio to a record 90.1% (1H24: 91.1%). Nonetheless, liquidity metrics remained robust, with the NSFR and LCR at 116% and 127% respectively, well above the regulatory minimum of 100%. CBA faces slightly higher near-term wholesale funding maturities; however, its substantial long-term wholesale funding base continues to underpin stability in the overall funding profile.

Westpac Banking Corporation (WBC)

Earnings Remain Resilient Amid Margin Pressure and Higher Costs

As shown in Chart 2, net interest income rose 2.5% YoY to AUD $9.4B in 1H25 (as of 31 March 2025) despite margin compression, with NIM at 1.80%, down 3 bps from the prior quarter on funding cost pressures. Non-interest income fell 1.4% YoY to AUD $1.4B. Loan growth remained solid at 5% YoY to AUD $825B, driven by a 5% increase in Australian housing loans, 14% growth in business lending, and 15% in institutional lending.

According to Table 3, pre-provision income fell 2% YoY to AUD $5.10B, mainly due to higher operating expenses from technology investments and wage growth, lifting the cost-to-income ratio up to 52.8%, the highest among the major banks. Finance costs increased 7.6% YoY to AUD $18.73B, reflecting mainly due to higher funding costs.  

Net income was broadly stable at AUD $3.33B, supported by a substantial reduction in impairment losses of 30.9% YoY to AUD $0.25B, driven by 6 bps of average gross loans, down from 9 bps a year earlier. This represents one of the largest reductions in impairments among the major banks, underpinned by strong household resilience, stable business conditions, and improved asset quality. Asset quality remained resilient, with Stage 2 and Stage 3 exposures holding steady or declining due to runoff in higher-risk loan portfolios.

Chart 2: WBC’s income breakdown and net interest margin

Table 3: WBC’s Financial and Credit Performance

Stable, and Resilient Credit Quality, complemented by Strong Liquidity Metrics

WBC reduced loan impairment provisions to AUD $5.07B in 1H25 from AUD $5.14B in 1H24 (31 March 24), driven by a sale of the auto finance portfolio and a stronger outlook for commercial property prices and interest rates. Provision coverage stood at 61bps of total gross loans, while the provision coverage ratio (PCR) fell 10bps YoY to 1.26%. Stressed loan exposure remained steady at 1.36% of total loans. With improvements in mortgage delinquencies and portfolio management, we view WBC’s asset quality remain resilient and well-managed.

The CET1 capital ratio fell 31bps YoY to 12.24% among the strongest in this sector (1H24: 12.55%), mainly due to dividend payments and an AUD $0.58B share buyback. This remains well above APRA’s 10.25% minimum and the bank’s 11.25% internal target, equating to AUD $8.9B in surplus capital. Westpac announced a further AUD $1.1B share buyback, expected to reduce the CET1 ratio to approximately 11.99% while still leaving an estimated AUD $7.8B surplus to support growth and absorb potential losses.

Liquidity metrics remain robust, with NSFR and LCR both at 115% and 135% respectively, comfortably above the 100% regulatory minimum. High-quality liquid assets (HQLA) rose by AUD $1.3B to AUD $182.8B, supported by a 7% YoY increase in customer deposits to AUD $697B, including a 9% rise in Australian household deposits. This lifted the deposit-to-loan ratio to a record 84.5% (1H24: 82.9%). Additionally, wholesale funding maturities are well staggered, which reduces refinancing “cliffs” and supports funding stability over the medium term.

National Australia Bank (NAB)

Cost Discipline Amid Credit Headwinds

As shown in Chart 3, net interest income rose slightly of 0.6% YoY to AUD $8.5B in 1H25 (as of 31 March 2025), supported by volume growth but offset by margin pressure, with NIM declining 2 bps YoY to 1.70% due to funding and competitive pressures. Non-interest income increased 3.4% YoY to AUD $1.8B, mainly from higher NAB risk management income in treasury partially offset by lower fees and commissions income. Loan growth remained solid at 4% YoY to AUD $756.3B, underpinned by a 3% increase in housing loans and a 6% increase in non-housing loans.

According to Table 4, pre-provision income fell 2% YoY to AUD $5.24B, mainly due to higher operating expenses major contribute from investment in technology and financial crime-related initiatives, lifting the cost-to-income ratio from 47.4% to 49.0%. Finance costs rose 2.2% YoY to AUD $20.7B, mainly due to increased wholesale funding costs and higher interest rates offered to attract and retain customer deposit, remaining well-controlled compared to amongst other bank.

Impairment loss expenses fell 7.4% YoY to AUD $0.35B, driven by a AUD $42M collective write-back from the release of AUD $194M in forward-looking provisions, partially offset by AUD $152M in charges from weaker asset quality and loan growth. However, increases in Stage 2 and Stage 3 exposures 3 exposures point to emerging signs of asset quality pressure. Overall, net income fell 2.9% YoY to AUD 3.45B.

Chart 3: NAB’s Revenue and Net Interest Margin Performance

Table 4 NAB’s Financial and Credit Performance

Pressure on Asset Quality Persist but Capital and Liquidity Profile Remain Strong

NAB increased loan impairment provisions by AUD $0.14B to AUD $6.04B in 1H25 (as of 31 March 2025), primarily due to higher individually assessed provisions for business lending, partly offset by lower collective provisions from forward-looking provision releases. Provision coverage stood at 68 bps of total gross loans, while the PCR fell 5 bps YoY to 1.42%. Stressed loan exposure rose 29 bps YoY to 1.49% from 1.20% in 1H24, reflecting deterioration in business banking and home loans, signalling increased pressure on asset quality.

The CET1 capital ratio fell 14 bps YoY to 12% in 1H25 (1H24: 12.2% as of 31 March 2024) and was down 34 bps from 2H24 as of September 2024 (12.35%), mainly due to Credit Risk-Weighted Assets (CRWA) growth of AUD $9.6B (-22 bps) and the completion of the Group’s on-market share buy-back (-15 bps). Despite the decline, the ratio remains well above APRA’s 10.25% regulatory minimum.

Liquidity metrics strong robust, with NSFR and LCR at 119% and 139% respectively, comfortably above the 100% regulatory minimum - one of highest among the big 4 banks. High-quality liquid assets (HQLA) remain strong and rose by AUD $3B to AUD $209B, supported by a 6.9% YoY increase in customer deposits to AUD $637.9B. This is This lifted the deposit-to-loan ratio to a record 85% (1H24: 82.9%). Wholesale funding maturities are also well staggered supporting stable liquidity and reducing refinancing risk.

Australia and New Zealand Banking Group (ANZ)

Sustained Net Interest Income Growth, but Credit and Cost Challenges Weigh on Performance

As shown in Chart 4, NAZ’s net interest income (NII) rose 12% YoY to AUD $8.9B in 1H25 (as of 31 March 2025), mainly driven by growth in average interest-earning assets from the acquisition of Suncorp Bank, higher average net loans and advances, and an increase in investment securities. Non-interest income grew 3% YoY to AUD $2.3B, supported by an AUD $236M gain from economic hedges. Loan growth remained solid, with total loans rising 15% YoY to AUD 820.9B, primarily due to the Suncorp Bank acquisition, robust home loan growth and higher business lending. These factors lifted pre-provision income by 8% YoY to AUD $5.37B.

However, operating expenses increased 11.8% YoY to AUD $5.79B, reflecting the impact of the Suncorp Bank acquisition, which added AUD $82M in amortisation of acquired intangible assets in 1H25, as well as higher personnel and technology expenses. This lifted the cost-to-income ratio from 51.0% to 51.9%. Finance costs also rose 11.8% YoY to AUD $23.9B, driven by increased volume and cost of wholesale funding, alongside a significant expansion in interest-bearing liabilities, largely from the Suncorp Bank acquisition. While Stage 2 and Stage 3 loan exposures recorded slight increases, this was largely attributable to the Suncorp Bank acquisition rather than organic deterioration in the existing loan book. This underscores that ANZ’s underlying asset quality remains stable. Overall net income rose 6.4% YoY to AUD $3.68B.

Chart 4: ANZ’s Revenue and Net Interest Margin Performance

Table 5: ANZ’s Financial and Credit Performance

Capital Pressures Amid Credit Deterioration, Liquidity Resilient

ANZ’s loan impairment provisions rose 6% YoY from AUD $4.37B to AUD $4.64B in 1H25, driven mainly by an additional AUD $0.25B allowance for expected credit losses (ECL) related to Suncorp Bank, and an AUD $153M deterioration in credit profiles across all divisions. Gross impaired assets surged 48% YoY to AUD $2.25B, reflecting factors such as restructured home loan facilities in Australian Retail, the acquisition of Suncorp Bank, and portfolio deterioration in other divisions. Overall, ANZ’s asset quality has remain stable - largely due to the acquisition but remains sufficiently covered by the bank’s provision which was 131 bps of total gross loans despite a slight 3bps drop YoY in PCR to 1.13%.

The CET1 capital ratio fell 170 bps YoY to 11.8% in 1H25 (1H24: 13.5%) and was down 42 bps from 2H24 (12.2%) is the lower amongst other big 4 bank. The decline was mainly due to the 2024 final dividend, higher risk-weighted assets (including the capital floor adjustment), and increased capital deductions, partly offset by earnings. Despite the drop, the CET1 ratio remains well above APRA’s regulatory minimum of 10.25%.

Liquidity metrics remained strong, with the Net Stable Funding Ratio (NSFR) and Liquidity Coverage Ratio (LCR) at 117% and 132% respectively, comfortably above the 100% requirement. High-quality liquid assets (HQLA) increased by AUD $24.3B to AUD $306B, supported by an 18% YoY rise in customer deposits to AUD $757.8B. This lifted the deposit-to-loan ratio to a record 92.2% (1H24: 89.6%), reflecting one of the most stable funding bases in the AU banking sector. Additionally, wholesale funding maturities are well staggered to providing stable liquidity and lowering refinancing risk.

Credit and Capital Comparison - Big 4 Australian Banks

While the big 4 Australian banks generally demonstrate a healthy credit profile, CBA and NAB stand out with slightly stronger metrics. CBA leads in asset quality and capital strength, with the highest provision coverage ratio (PCR 1.62%) and a (CET1 12.2%), combined with operation efficiency, making it well-positioned to take on greater provision and bad loans. NAB demonstrates the strongest liquidity profile, with an NSFR of 119% and LCR of 139%, alongside solid capital (CET1 12.0%), supporting stable funding and operational resilience.

Both WBC and ANZ remain stable and reliable choices, supported by solid capital and liquidity positions. While their credit profiles differ, both maintain sufficient buffers to absorb risks and support growth. Collectively, the four major banks remain fundamentally sound — with CBA and NAB offering slightly greater stability, WBC providing reliability, and ANZ presenting potential for higher returns, albeit with elevated risk.

Table 6: Credit Matric Peer Comparison

Mortgage Market Leadership

The Big Four Australian banks of CBA, WAC, NAB, and ANZ together account for 74% of the country’s mortgage market, highlighting their dominant position in housing finance. Mortgages make up a significant portion of their domestic loan books, ranging from 59% to 72%, which underscores the banks’ reliance on housing credit as a core asset class. Despite this concentration, borrowers maintain substantial equity, with current Loan-to-Value Ratios (LTVs) between 39% and 49%, slightly below their 5-year averages of 41%–51%. This strong collateralization provides a buffer against potential property market corrections.

Credit quality remains robust, as reflected in low mortgage non-performing loans (NPLs) of 1.0% to 1.5%, broadly in line with historical averages. Even NAB, which shows a modest increase in NPLs relative to its 5-year average, remains within manageable levels. These metrics indicate that, although the banks are highly exposed to housing, their mortgage portfolios are well-protected by prudent underwriting and borrower equity. Structural factors, such as the Four Pillars Policy (prevents mergers among the Big Four banks) further reinforce resilience by preserving competition and reducing systemic risk. Overall, the combination of dominant market share, high collateral coverage, and low credit losses underpins the stability and attractiveness of the Big Four banks’ mortgage business.

Table 7: Mortgage Market Share and Portfolio Risk Metrics of Australia’s Big Four Banks

Australia Mortgage Market Outlook

RBA rate cuts support housing market: In 2025, the Reserve Bank of Australia (RBA) implemented three official interest rate cuts, in February, May and August each by 25 bps. This reduced the cash rate from 4.35% at the start of the year to 3.60% by August. These rate cuts reduced borrowing costs and increased household borrowing capacity, encouraging both first-home buyers and investors to re-enter the market.

Government policy support further bolstered housing affordability: Measures such as reforms to negative gearing (which allow property investors to offset rental losses against taxable income), stamp duty concessions, and first-home buyer incentives have helped reduce upfront costs and are expected to stimulate future demand.

According to The Guardian, all eight capital cities recorded price growth in the June quarter the first time in four years led by Sydney, Melbourne, and Perth. Brisbane saw a 7.5% surge in house prices and a 13.3% jump in unit prices, highlighting affordability-driven demand for apartments.

Credit growth point to improvements in housing activity: As shown in Table 8, owner-occupier loan commitments rose 2.4% QoQ to AUD $54.7B, while investor commitments increased 1.4% QoQ to AUD $32.9B, bringing total housing loan commitments to $87.7B up 2.0% QoQ and 7.2% YoY.

Sustainability of housing market recovery will depend on macro factors: Australia’s housing market is in recovery, supported by recent rate cuts and policy incentives. However, the durability of this rebound remains sensitive to broader macro headwinds such as slower economic growth, higher unemployment, or external shocks that could weigh on demand. That said, a sharp deterioration in asset quality appears unlikely, as banks’ prudent lending standards, strong borrower equity positions, and historically low arrears continue to provide resilience.

Australia’s Big Four banks, holding a dominant 74% share of the mortgage market, are well-positioned to benefit from rising housing loan demand in 1H25, reflecting the ongoing recovery in the housing market. Their healthy asset quality, robust capital and liquidity buffers, and strong housing market fundamentals provide resilience against potential downside risks.

Table 8: Australia Value of New Loan Commitments

Overall, Australia’s Big Four banks of CBA, WBC, NAB, and ANZ remain dominant in the banking and mortgage markets, supported by strong capital, robust liquidity, and policy protections. Despite varying asset quality and cost challenges, all four banks continue to show solid loan growth, stable income performance, and resilience amid interest rate cuts and government housing support.

Key Risks

• Housing market concentration: The Big Four’s heavy exposure to mortgages leaves them vulnerable to a property downturn, which could weaken loan performance and capital buffers.
• Credit risk from household leverage: Elevated household debt and high property prices heighten sensitivity to economic shocks. Rising unemployment could increase defaults, particularly in housing loans.
• Policy and regulatory uncertainty: Potential changes to housing incentives or macroprudential rules could affect loan growth and credit availability, impacting bank revenue and strategy.

Recommendation

The Big Four Australian banks continue to demonstrate strong credit profiles, underpinned by robust capital buffers, leading market positions, and stable earnings from mortgage lending, despite existing impairment and cost pressures.

For investors seeking higher yields and willing to accept modestly higher risk, subordinated Tier 2 bonds from these banks offer an attractive opportunity, as highlighted in Tables 9 and 10. 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, ultimately benefiting investors. Additionally, investors should remain mindful of currency risk, particularly potential depreciation of foreign currencies against the MYR, which could reduce overall returns.

Table 9 Long Term AUD Tier 2 bonds

Table 10 Mid-term USD Tier 2 bonds

Table 11 Long-term USD Tier 2 bonds