Australian Banking Analysis webcast | Full-Year 2026
Executive summary
Higher earnings, shifting foundations
Australia's major banks reported combined cash earnings of $32.5bn for FY26, up 8.1% on the prior comparative period (pcp). The strongest growth since FY23, following declines in FY24 and FY25. Excluding notable items, cash earnings rose 6.7% to $33.8bn. Return on equity (ROE) improved 81bps to 11.4%, with the second half reaching 12.1%, its highest level since 1H23. Net interest income (NII) grew 3.6% to $81.7bn as average interest-earning assets expanded 4.1%, while the net interest margin (NIM) eased 1bp to 1.81%, broadly flat on FY25.
The result was built on volume and cost discipline rather than margin. Income growth of 3.4% outpaced expense growth of 1.2%, lowering the expense-to-income (ETI) ratio by 105bps to 48.1%. Yet the environment in which these earnings were generated changed materially through the year, with significant disruption across tax policy, interest rates, geopolitics and the cost of living and technology. The rise in cash rate to 4.6%, (increased again to 4.8% in early November) the conflict in the Middle East and the Federal Budget changes to negative gearing and capital gains tax have created a tougher operating environment, weakening borrower demand and market dynamics for mortgages, intensifying competition for both loans and deposits, and beginning to test parts of the loan book. The story of FY26 is therefore less about the headline result and more about how the sources of growth, and of risk, are shifting beneath it, with technology, AI and lending mix all driving that change and shaping how the majors respond.
Business lending carries growth as mortgage demand turns
Total lending grew 5.4% to $3.7tr, reducing slightly from 5.5% in FY25. Business lending grew at more than twice the pace of housing in the year to September 2026, driven in part by 17% growth in institutional lending. Mortgage applications at Jun-26 have fallen by an average of 15% across the majors since 2Q26, and the majors' share of ADI lending has reached a new low of 71.4% at September 2026.
Business lending continues to be the majors' principal lever for growth as housing lending slows. Its higher margin supports NIM, but with all four majors prioritising the same segment, competition is placing pressure on pricing. At the same time, the shift toward business lending increases the credit risk carried per dollar lent.
In home lending, the pressure point is distribution as much as demand. Brokers originated a record 81% of new home loans in the March 2026 quarter1. As application volumes fall, competition through third-party channels has become more expensive. Non-major banks and mutuals also continue to take share, growing housing credit at 8.3% and 9.8% respectively, compared with 4.5% for the majors over the year to September 2026. Mutuals are now the fastest-growing group of housing lenders, lifting their share of ADI housing lending to 3.1% from 2.9% a year earlier. Settlements lag applications by several months, and the slowdown in demand is now reaching balance sheets where the majors' annual housing credit growth eased from 5.9% at June 2026 to 4.5% at September 2026. Investor lending slowed most sharply. Investor lending grew by 7.2% in the year to June 2026, however had moderated to 5.2% by September 2026, falling by 0.5% in the last quarter of the year as the Budget changes to negative gearing and capital gains tax weighed on investor demand. Investor loans now make up 34.0% of the majors' housing lending, down from 40.5% in March 2019.
Credit expenses rise as banks strengthen provisions
Credit impairment expense rose 56.0% to $3.8bn, equival`ent to 10bps of gross loans and the highest since COVID levels. Total provisions rose 5.8% to $23.4bn but provision cover remains flat at 64bps.
The majors are preparing for more challenging conditions, building provisions through overlays, reflecting expected deterioration in credit quality within parts of the portfolio and downgraded economic forecasts. Stage 3 provisions grew 8.5% to $7.0bn, outpacing total provision growth as mortgage and consumer arrears edged higher amid sustained cost-of-living pressures. Stage 1 provisions grew fastest (11.8%) and Stage 2 was broadly flat (0.8%). Despite this, provision cover remains within the 63-67bps range sustained since 2H22.
The exposures experiencing significant pressure are those where rate and policy changes intersect: investors absorbing the Budget tax changes, higher loan-to-value first home buyer lending written near peak rates, and a fast-growing business book that has not yet been tested through a full credit cycle. The banks have responded by lifting downside scenario weightings and adding to overlays. Common equity tier 1 (CET1) ratio of 12.1% remains well above the 10.25% regulatory minimum, providing a further layer of resilience.
Deposit competition reshapes the funding mix
Customer deposits grew 6.9% to $3.2tr, outpacing lending growth. The majors' share of system deposits fell one percentage point to 73% at September 2026, down from 74% in 2023.
Deposit composition has shifted towards higher-yielding products. As the cash rate rose, growth in transaction deposits slowed from 11.0% (annualised) at December 2025 to 8.9% at June 2026. Growth in savings and term deposits increased from 3.1% to 6.3%, as customers sought higher returns. Competition from outside the majors is also increasing. Non-majors increased household deposits by on average 8.4% over the year to September 2026, compared with 7.9% for the majors. The benefit that higher rates delivered through deposit and capital replicating portfolios was largely offset by competitive pressure on deposit pricing and lending margins, leaving NIM broadly flat.
Other banking income lifts OOI as the payments outlook changes
Other operating income (OOI) increased 4.5% to $15.7bn in FY26, mainly driven by other banking income. Fees and commissions remained the largest part of OOI and grew modestly at 2.9%. Trading income was broadly flat and wealth management income edged higher. Together these lifted OOI's share of total income slightly, to 16.2%, well below the 24% recorded in FY19.
Payments, as a key contributor to OOI, are moving from a relatively stable, infrastructure-led business to one requiring active strategic choices about where to compete, where to partner and where to invest. Regulatory change is compressing traditional revenue pools and resetting infrastructure. Interchange caps put further pressure on card economics, while the payments modernisation roadmap, including the decommissioning of cheques and the transition away from BECS, requires significant investment in new capabilities and migration of customers and corporates onto modern rails. Non-bank and digital-native bank competition continues to intensify in acceptance, cross-border and embedded payments, capturing margin at points in the value chain that were historically major bank-owned. Stablecoins and agentic commerce, only a year ago considered conceptual, are rapidly becoming a strategic reality to be addressed as both a threat and opportunity.
Plotting a path to productivity with traditional playbooks and new technologies
At 48.1%, the ETI ratio fell by 1% from FY25, but remains around three percentage points above the 45.0% recorded in FY23. FY26 delivered the first positive jaws since FY23, with income growth of 3.4% outpacing expense growth of 1.2%. At this pace, closing the gap to FY23 would take around three further years.
Technology costs rose 2.2% to $9.0bn, while full-time equivalent (FTE) staff of 169k fell 1.1% from the 2H25 peak, but still remains the highest level since 2H14. Income per FTE, based on total income excluding notable items, increased 4.5% and has risen in each half since 2H25. Operating expense growth slowed to 1.2% ($46.7bn), from 6.8% in FY25.
Lower headcount and higher income per FTE are beginning to point to improving productivity, part of which may be attributable to AI. The majors report widespread adoption of AI, but the harder question is value, with measurable productivity or financial benefits challenging to isolate, and only one form of benefit to be gained from AI adoption and scale. Reporting by the majors focuses on adoption rates, saved hours and outperformance on project timelines and AI features alongside traditional productivity approaches of simplification, technology modernisation, offshoring and restructuring.
Fraud prevention in focus
Fraud prevention is one of the most visible areas of AI investment across major banks, with investment spanning real-time transaction monitoring and investigations, machine-learning detection, biometrics and confirmation of payee and broader data and analytics capabilities. The Scams Prevention Framework is reinforcing these investments as banks strengthen their prevention architecture to keep pace with increasingly sophisticated threats, including deepfakes and synthetic identities. This also creates an opportunity to manage fraud across the full customer and credit lifecycle, rather than treating payments fraud, lending fraud and credit risk as separate issues.
For example, in home lending the focus is broadening beyond detecting fabricated documents to validating identity, income, employment and other application data against trusted sources, while using analytics to identify unusual relationships and patterns across the origination chain, including applicants, brokers and referrers. This matters because loans acquired through fraudulent means can appear to perform normally, meaning downstream arrears and credit-loss indicators alone may not provide sufficient fraud controls. Preventing and detecting fraud early protects both lending integrity and asset quality.
Our detailed analysis addresses the four areas that shaped the current period: earnings and income, credit and capital, expenses, and funding.
Explore the analysis in numbers
Earnings and returns
Cash earningsCash earnings rose 8.1% pcp to $32.5bn, driven by higher net interest income and supported by a slowdown in operating expense growth excluding notables to 1.2% (from 6.8% in FY25), partly offset by higher credit impairment charges. Excluding notable items, which were higher in the comparative periods, cash earnings grew 6.7% pcp and 5.1% hoh.
Return on equity (ROE) Return on average equity (%)
ROE rose 81bps to 11.4%, as cash earnings growth outpaced growth in average equity, returning to FY24 levels (11.1%). 2H26 ROE improved to 12.12%, its highest level since 1H23.
Revenues
Net interest income (excl. notable items)NII rose 3.6% to $81.7bn, driven by growth in interest-earning assets, led by business lending. Margins were broadly flat, with competition for new lending, particularly in home loans.
OOI rose 4.5% to $15.7bn, driven mainly by higher other banking income, with fee and commission income also up. OOI's share of total income is flat at 16%, (24.0% in FY19) following a decreasing trend since FY11.
Lending
Net interest margin (NIM) (%)NIM was broadly flat for the year and stayed within the narrow range held since FY24. Competition squeezed lending margins, but higher returns on the banks' deposit and capital hedges largely offset this. With margin steady, net interest income growth of 3.6% came from balance sheet growth, as lending volumes rose across both halves.
Lending grew 5.4% to $3.7tr, broadly in line with FY25, and growth was stronger in the second half than the first. Business and institutional lending grew at more than double the rate of home lending, as the majors expanded institutional lending institutional lending alongside higher-margin business lending to balance their risk profile while maintaining profitability.
Expenses
Operating expenses (excl. notable items)Expense growth slowed sharply from FY25 to its lowest rate since FY22, although consistent with trend, costs were higher in the second half than the first. Personnel and technology costs both increased, but workforce numbers fell. Notable items, mainly restructuring costs, added further to costs on a reported basis.
The ETI ratio fell 105bps to 48.1%, reversing most of the FY25 increase and returning close to its FY24 level. Both net interest and other operating income grew, and together they outpaced a markedly slower rise in costs. The ratio edged up in the second half, as lower other operating income slowed income growth.
Asset quality
Credit impairment expenses (excl. notable items)Credit impairment expense rose 56% to $3.8bn, lifting the loss rate to 10bps (7bps in FY25), its highest level since FY20. The higher charge reflected the combined impacts of the Middle East conflict, higher interest rates and movements in property prices.
Credit provisions rose 5.8% ($1.3bn) to $23.4bn, outpacing lending growth (+5.4%). Stage 3 provisions grew at 8.5%, while Stage 2 provisions rose 0.8%. Banks also lifted downside scenario weights and existing overlays in response to heightened geopolitical uncertainty.
Balance sheet
Credit provision cover Total provisions for credit impairment as a % of GLAAProvision cover stayed flat at 64bps, as credit provisions (+5.8%) grew faster than gross loans (+5.4%). Provision cover has remained within a 63–67bps range since FY22, above the pre-COVID level of 60bps in FY19, with banks maintaining higher levels of cover amid successive economic and geopolitical shocks.
Core equity T1 Common equity tier 1 ratio (%)
The CET1 ratio was broadly stable at 12.1%, as the majors continue to hold strong capital buffers given the uncertain outlook, with the ratio well above the 10.25% regulatory minimum, a consistent trend seen over the past decade.
Building resilience, readying for what’s next
Earnings income
Higher income lifts earnings above the previous FY23 result
The major banks' combined cash earnings rose 8.1% to an all-time high of $32.5bn in FY26, surpassing the previous high of $32.4bn recorded in FY23. Notable items were smaller than in FY25 and were mostly recorded in the first half. Improvement this year came from the revenue line where growth in income was almost three times the growth in operating expenses, more than offsetting a higher credit impairment charge.
Figure 1 shows that the year was weighted towards the second half. Cash earnings increased in each half of FY26, and 2H26 was higher than any previous half since 1H11. ROE followed the same path, rising in both halves from its 2H25 level, although the full-year ratio of 11.4% remains below that recorded in FY23.
NII was the main contributor and reached a record level, growing slightly slower than average interest earning assets. The margin narrowed in both halves in FY26, as competition for lending weighed on asset pricing. This impact of competition was largely offset by hedging benefits, leaving NIM down 1bp compared to FY25.
Figure 2 places this in a longer context by plotting the margin against the size of the interest-earning balance sheet, with the dashed lines marking constant levels of half-year NII. Between 1H10 and 1H22, the path runs down and to the right. The margin declined steadily, but the balance sheet grew quickly enough for NII to keep rising. Since 1H22 the shape has changed. The margin has moved within a narrow band, rising to a peak in 1H23 and remaining below that level since, while balance sheet growth has continued.
Unlike the previous tightening cycle, NIM has not widened as the cash rate has risen through 2026. In 2022-23, a 3.5% increase in cash rate coincided with NIM widening 15bps. The cash rate has risen 100bps this year to 4.60%, but NIM narrowed 4bps to 1.81%.
Other operating income grew faster than NII, at 4.5%, and was broadly unchanged in the second half, lifting its share of total income for the first time after several periods of decline. Within this, fees and commissions increased while trading income was broadly unchanged.
Total lending growth for the year was slightly above FY25, although it reduced in the second half. Figure 3 shows the changing mix of the majors' Australian lending alongside movements in the cash rate.
Non-retail lending (business and institutional) has grown faster than consumer lending in every quarter since September 2021. The gap widened in FY26, with annual non-retail lending growth reaching its highest level since September 2022.
Consumer lending growth strengthened to June 2026 before slowing in the September 2026 quarter. Meanwhile, non-retail lending growth continued, increasing its share of the majors' Australian lending from 29% at the end of 2020 to 35% in September 2026. Over this period, the cash rate fell during 2025 before increasing in each quarter of 2026.
Across the industry, the majors continue to grow more slowly than the system. Figure 4 shows that major bank credit growth has risen since 2023 but has remained below the non-major bank growth rate since December 2022. Overall system growth eased in the September 2026 quarter.
The majors' share of total credit has fallen from 70.6% in August 2019 to 65.2% in September 2026, with the decline accelerating over the past 12 months. Non-bank financial institution (NBFI) credit growth also rose sharply through 2026 and, in September 2026, was almost three times the major bank rate.
Figure 1: Cash earnings and ROE increased in both halves of FY26
Figure 2: Increase in NII in FY26 – driven by volume growth given NIM pressure
Figure 3: Non-retail lending growth for the major banks continues to outperform consumer lending
Figure 4: Majors' share of total credit decline to a series low as NBFI credit growth accelerated.
Credit and Capital
Credit costs rise in both halves of the year
Credit impairment expense increased by more than 50% to $3.8bn. Charges rose in both halves, with 2H26 around 17% above 1H26. Individual provision charges, excluding write-backs, rose over the year but eased slightly in the second half.
Figure 5 shows impairment charges alongside the level of provisions held. Provision coverage fell as collective provisions were released between 1H21 and 2H22 and has remained within a narrow band of 63bps to 67bps since 2H22. Coverage edged up in 1H26 and was broadly unchanged in 2H26. With coverage held broadly steady while the loan book grew 5.4%, provisions have increased in step with balance sheet growth. The $1.3bn increase in provisions represents around 67bps of the increase in gross loans, compared with coverage of 64bps across the book, reflecting a more cautious outlook. This flowed through to the impairment charge, with credit impairment expense as a share of gross loans, annualised and shown by the line in figure 5, rising in both halves of FY26.
The composition provides further insight. Stage 3 provisions, which are held against loans that have defaulted or become impaired, rose 8.5% ($0.5bn) over the year, increasing in both halves and outpacing growth in the loan book. Stage 1 provisions, the stage where newly originated loans are typically provided for, accounted for most of the remaining increase, rising 11.8% ($0.6bn), while Stage 2 provisions, held against loans that have shown an increase in credit risk, rose 0.8% ($87m), around 7% of the rise in total provisions. The increase therefore reflects both realised stress and a more cautious view across the performing book.
Capital levels increased over the year, but growth in risk-weighted assets was stronger. As a result, the CET1 ratio eased to 12.1%, its lowest full-year level since FY22, and remains 185bps above the 10.25% regulatory minimum. Figure 6 shows how the capital stack has changed over time. Tier 2 capital has grown in every half since 2H19 and has more than tripled, while CET1 capital has increased more gradually. Despite this growth, the CET1 ratio remains between the 11.6% and 12.7% range since 2H21 and eased in 2H26. The total capital ratio also declined over the year.
Figure 5: Provision coverage remains within the range held since 2H22, while impairment charge rose in both halves of FY26
Figure 6: Capital levels are in line with FY25, with a slight decrease in the CET1 capital ratio
Expenses
Expense growth slows as income outpaces costs
Operating expenses excluding notable items rose 1.2% to $46.7bn, a marked slowdown from growth of more than 6% in each of FY24 and FY25 and the slowest rate since FY22. The year was uneven. Expenses fell 3.1% in the first half compared with 2H25, before rising 2.3% in the second half. On a statutory basis, the $0.8bn increase in total expenses was driven by other expenses and technology costs, with personnel costs broadly unchanged.
Income grew at almost three times the rate of expenses, at 3.4% compared with 1.2%. This delivered positive jaws, with income growing faster than expenses, for the first time since FY23. As a result, the ETI ratio fell 105bps to 48.1%, reversing most of the increase recorded in FY25. Figure 7 shows that the improvement came in the first half, when expenses fell while income rose. In the second half, expenses grew faster than income, and the ratio edged up.
Figure 7 also shows how the cost base has changed. Personnel costs remain the largest component of expenses, at 57%. Technology costs grew 2.2% in FY26, faster than the 1.6% growth in total expenses. Since FY23, technology has accounted for around a third of the growth in total expenses, lifting technology's share of the cost base from 17% to 19%.
Figure 8 shows that headcount fell 1.1% from its 2H25 peak to 2H26, partly reversing the increase between 1H24 and 2H25, with most of the reduction occurring in the first half. Combined with higher income, the lower headcount lifted income per FTE by almost 4.5%, following a broadly flat period between 1H23 and 2H25.
Investment spend continues to grow faster than the cost base. Investment spend rose 2.3% to $7.9bn in FY26, faster than the 1.6% growth in total operating expenses, lifting its share of the cost base to 16.3% from 16.1% in FY25. Spending was weighted towards the second half, which accounted for 54% of the FY26 total.
Figure 7: Expense growth slowed in FY26 and the ETI ratio improved
Figure 8: Total FTE has declined in FY26, while income per employee rose in each half
Funding
Deposit growth outpaces lending
Customer deposits grew 6.9% to $3.2tr, the 16th consecutive half of growth. Deposits again grew faster than lending, lifting the ratio of deposits to gross loans to 88%, compared with 75% in 1H17.
Figure 9 shows the role of deposits in the majors' funding. After a step-up in 2020, deposits provided between 69% and 70% of total funding in every half from 2H21 to 1H26, with non-deposit funding growing broadly in line with deposits over that period. In 2H26 the share rose to 70.7%, its highest level since 2H17.
Figure 9: Deposits as a proportion of funding remains strong
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