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Banking Matters
Major Banks Analysis | Half Year | May 2026
Executive summary
Stronger footing, shifting horizon
Australia’s major banks reported cash earnings as $15.3bn in the first half of FY26, a 7.6% increase compared to the prior half (2H25). Removing the effects of notable items, cash earnings rose by 5.2%. Return on average equity increased to 10.7%, up 71bps half-on-half, recovering from the four-year low recorded in 2H25. Overall, the banks remain in a strong position as they face increased uncertainty in the outlook. Total capital levels increased in the half, and the majors now hold $36bn capital over and above regulatory minimums of 10.25%.
Beneath the headlines, a more complex picture is forming. The escalation of the conflict in the Middle East and the resulting supply-side shock to global energy markets and supply chains intensified towards the end of the period. History shows that the transmission to borrower stress, and credit losses will take time. This set of results therefore does not reflect underlying stress, but rather captures the uncertainty ahead, with the potential economic effect ahead of us.
Lending momentum offsets ongoing margin compression
Underlying performance was robust. Net interest income (NII) reached $40.5bn, broadly flat half-on-half (+1.2%) as moderate volume growth offset NIM compression of 3bps to 1.82%. Sustained competition within lending weighed on the margin, with volume growth once again the primary mechanism through which banks are sustaining income growth. Non-interest income provided support, increasing 4.4% hoh to $7.9bn.
Lending momentum remained positive at 4.7% (annualised), though this moderated from the prior half (-121bps). Focus on lending to businesses continued, with balances now representing over 34% of total Australian lending for the major banks. Yet the competitive landscape remains challenging, with all four of the major banks prioritising a similar strategy in this segment and facing sustained pressure from the non-major banks and non-banking financial institutions (NBFI). Non-proprietary channels reached an all-time December high1, despite each of the four banks actively pursuing proprietary origination and noting upticks via direct channels.
PwC Major Banks Analysis Webcast | Half‑Year | May 2026
Explore the analysis in numbers
Earnings and returns
Cash earningsCash earnings increased by 7.6% hoh to $15.3bn, a $1.1bn increase driven by a reduction in operating expenses and improvement in income. NII grew modestly, supported by volume growth but was offset by continued NIM compression in the half. Excluding one-off items, cash earnings grew by 5.2% hoh and 4.6% pcp.
Return on equity (ROE) Return on average equity (%)
ROE rose 71bps to 10.7%, recovering from the four-year low of 10.0% recorded in 2H25. The increase was driven primarily by higher cash earnings, with average equity levels rising only marginally.
Revenues
Net interest income (excl. notable items)NII increased 1.2% to $40.5bn - broadly flat in half-on-half terms. Moderate GLAA volume growth was partially offset by continued NIM compression.
OOI increased 4.4% hoh to $7.9bn, driven by trading income which grew 9% (annualised), while fees and commission income increased by 4% hoh.
Lending
Net interest margin (NIM) (%)NIM decreased 3bps in the half to 1.82%. Sustained competition within lending (-3bps) and markets (-1bp) weighed on the margin, partially offset by modest improvements in deposit pricing (+1bp). The structural decline in NIM continues, with volume growth required to sustain NII.
Lending growth remained positive at 4.7% (annualised), though growth momentum moderated, down 121bps hoh and 17bps pcp. Business and institutional lending were the fastest growing segments for the majors, growing at 11% (annualised) in the half and now comprises 34% of total Australian loans for the major banks, up from 30% in 2022.
Expenses
Operating expenses (excl. notable items)Operating expenses declined 5.1% from the record high in 2H25 to $23.1bn. A reduction in FTE and personnel costs following the one-off costs incurred in the prior half, was the primary driver. The majors have attributed this to simplification programs over the prior 18 months, continued offshoring and productivity gains.
ETI for the majors reduced 350bps to 47.9%, down from the historic high of 51.4% in 2H25. The improvement reflects a simultaneous reduction in operating expenses and growth in total income and represents the first meaningful reversal of the cost escalation trend that has persisted since 1H23.
Asset quality
Credit impairment expenses (excl. notable items)Credit impairment expense grew 28.0% to $1.7bn, a $0.4bn increase hoh. Growth in collective provisions was the primary driver, reflecting a more cautious outlook. Impaired assets also continue to increase as a proportion of gross loans (although at a slower rate). The loss rate rose to 10bps (annualised), its highest point since 2H20.
Credit provisions grew 3.0% from 2H25, representing a $0.7bn increase. Banks have acknowledged potential stress due to recent geopolitical conflict, with the majors increasing downside weights or increasing scenario severity, raising new overlays or both.
Balance sheet
Credit provision cover Total provisions for credit impairment as a % of GLAAProvision coverage remained flat at 64bps, within the 63–69bps range sustained since 2021, and 9bps below 1H20. Successive exogenous shocks (COVID, significant supply chain disruptions and geopolitical events) elevated the provisioning baseline above pre-pandemic norms.
Core equity T1 Common equity tier 1 ratio (%)
CET1 rose 4bps to 12.2%, with CET1 capital increasing $4.7bn in the half. Each of the majors have increased their capital ratios, reflecting potential uncertainty in the outlook raised by the March reporters in their presentations. The ratio remains well above the minimum regulatory requirement of 10.25%, a consistent trend seen over the past decade.
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Earnings income
Strong earnings performance, despite continued competition
Headline results as reported has cash earnings increasing 7.6% half-on-half to $15.3bn, up from $14.2bn in 2H25. The prior half was weighed down by restructuring charges and one-off items, meaning the recovery reflects a normalisation from a depressed base rather than underlying acceleration. Removing the effects of notable items, cash earnings rose 5.2% on a pcp basis.
Both net interest income and non-interest income were up within the year, increasing 1.2% and 4.4% in the half respectively. Operating expenses excluding notable items declined 5.1% from the record high in 2H25, providing meaningful support to the result, while credit impairment expenses rose 28% due to higher provisions recognising heightened uncertainty in the outlook. Return on equity (ROE) rose to 10.7%, a 71bps increase from 2H25 however remains below the prior comparative period. Over the past four years, ROE has consistently hovered between 10.5% and 12.0%, reflecting the difficulty of navigating substantial technological transformation, cost pressures, intensifying competition and regulatory settings simultaneously.
Underlying profitability remained robust. Net interest income (NII) reached $40.5bn, broadly flat half-on-half (+1.2%), as moderate lending volume growth offset continued NIM compression. Sustained competition within lending weighed on the margin, with volume growth once again the primary mechanism through which banks are sustaining income generation.
When analysing the change in NII, Figure 2 provides a useful way of assessing the intersection of the two major drivers - NIM and Average Interest Earning Assets (lending volume). The solid dots graph the majors over time and moves from 1H10 (top left) to 1H26 (bottom right) - with each dot showing the NIM for the half (y‑axis) and the corresponding Average Interest Earning Assets (x ‑axis). This intersection on the x‑ and y‑ axis is the resulting NII for the half (denoted by the grey curves).
If we follow the points from top left to bottom right, we see the familiar picture of a consistent decrease in NIM (y-axis), however this has been more than offset by the increases in lending volumes (x-axis). The net result is a steady increase in NII despite a structural decline in NIM.
The Reserve Bank of Australia's prior rate increase cycle from 2022 to 2024 boosted the NIM, which peaked in the first half of 2023. However, a steady decline followed, correlating with the intense competition experienced in recent years. Over the most recent half the 3bps reduction in NIM reflects continued competition within loan pricing (-3bps), improved returns in deposit pricing (+1bps) and a moderate decrease in capital, markets and liquid assets (-1bps). The RBA's decision to raise rates at 3 successive meetings in early 2026 adds a further dimension to the NIM outlook - with rate transmission to bank margins historically operating with a 6-month lag. The early movements from this cycle are likely to appear in the full-year results, though the full impact will increasingly take shape in subsequent periods.
Lending momentum continued, with gross loans and advances growing 4.7% over the half on an annualised basis. While home loans remained the largest component of the lending mix, business lending continued to gain prominence, reflecting banks' strategic focus in this segment.
Focusing on Australian lending only, the structural shift in loan book composition continues to accelerate. Figure 3 highlights the ongoing divergence between business and residential loan growth for the majors, based on APRA monthly statistics. Business lending has been the dominant growth engine over the past six years, now representing 34% of total lending, up from 30% in 2022. With more attractive margins and sustained strategic focus from all four majors, this shift has been deliberate. However, as competition in business lending intensifies, and early signs of reduced consumer confidence leading to a pull-back in spending, the sustainability of growth, margins and credit quality will remain in focus.
The Government funded NRF, is providing credit relief to eligible businesses in a more targeted nature than what we saw in COVID. $15bn worth of interest free loans are being provided by the fund. These funds have mostly been made available to businesses which are important in the structural shift to Net Zero and those most directly economically effected by the oil supply shock. This response attempts to balance the support of the experienced supply-side shock against Australia’s rising inflation.
Despite strong lending growth, the majors continue to lose market share to non-major banks, NBFIs and smaller institutions, though the pace of decline is moderating. APRA data shows total system loan growth averaged 8.1% annually, compared with 7.3% for the majors. As shown in Figure 4, market share has begun to plateau at just under 66%.
Figure 1: Earnings and ROE see a slight dip, due to a number of one-off items
Figure 2: NIM Record NII in 1H26 – driven by volume growth and an improving trend in NIM
Figure 3: Business lending growth for the major banks continues to outperform residential, a trend since 1H23
Figure 4: Majors' market share reached a plateau
Non-major banks and NBFIs are the primary beneficiaries, growing at 9.8% and 8.6% respectively on an annualised basis over the past six months. Their openness to broker-originated lending is a key driver. Non-proprietary channels accounted for 76.7% of all new residential home loans in the December 2025 quarter¹ - the highest level on record for a December quarter. The majors, by comparison, write between 33% and 69% of volumes through non-proprietary channels. Within the NBFI category, private credit continues to emerge as an increasingly significant part of the Australian lending market.
Credit and Capital
More cautious than coverage ratio suggests
On the surface, credit quality looks stable, but the composition of that stability has shifted in ways that warrant closer attention. Provision coverage has remained broadly flat at 64bps, sitting comfortably within the 63–67bps range sustained since 2021 (see Figure 5). Total provisions grew by 3.0% to $22.8bn, a $0.7bn increase that tracks asset expansion rather than signalling a material build above it. With each successive shock - COVID, the inflation cycle, and now geopolitical disruption - banks have maintained relatively high weights on their downside scenarios.
This has seen coverage remain relatively stable in recent years, with the sector entering this latest episode with some provisions already in hand. It also explains why banks made modest adjustments to their economic scenarios settings and overlays, in anticipation of future stress that may emerge. Credit impairment expense therefore rose to $1.7bn, a 28% increase half-on-half, implying a loss rate of 10bps annualised, which is the largest we have observed since 2H20, but still relatively low when compared to pre-COVID levels.
Beneath that steady coverage ratio, however, the underlying credit dynamics are mixed. Mortgage 90+ arrears improved across all majors, while gross impaired assets as a proportion of GLAA has remained flat at 0.3%, having drifted higher since 0.23% in 1H23. Growth in this ratio has slowed, however, this still indicates a steady flow of impaired assets to be worked-out. The nature of these impairments reinforces the case for caution. Individually assessed provisions as a percentage of impaired assets remain elevated at 13.4%, indicating that loans are moving through staging from being collective to individually assessed.
Capital supports stability through the cycle
Total capital rose by 1.3% to $393.7bn this half, with increases in common equity (from earnings) and Tier 2 capital issuances. The CET1 ratio remains well above the regulatory minimum of 10.25% at 12.2%, increasing marginally by 4bps from last half.
Australian major banks remain well positioned to absorb a deterioration in credit conditions and continue providing vital intermediation services through an economic downturn.
Figure 5: Provision coverage remains within the post-2021 range — successive shocks have reinforced rather than depleted the buffer
Figure 6: Capital levels are in line with 1H25, with a decrease in CET1 capital ratio
Expenses
Cost discipline realised, but sustained savings yet to be proven
The expense-to-income ratio (excluding notables) reduced to 47.9%, a 350bp improvement to the peak recorded in 2H25 (Figure 7). Operating expenses declined 5.1% half-on-half to $23.1bn, the first meaningful reduction following a sustained period of cost escalation since 1H23.The majors attributed this reduction to productivity improvements flowing from prior restructuring efforts, seasonal tailwinds and disciplined cost management.
The question now is whether this initial uptick in productivity is structural, translating investment into simplification and automated workflows, or a temporary reprieve that operational complexity will erode.
Workforce composition has been a key lever. Full-time equivalent employees peaked at over 171,000 in FY25, surpassing the previous high recorded in FY15 as the multi-year reconfiguration of the workforce played out (Figure 8). Since that peak, FTE employed across the major banks has reduced to 169,000, representing early cost savings from restructuring. Income per FTE grew within the half, reaching its highest real (inflation adjusted) point since 2023, as banks reported tangible gains from simplification programs, selective offshoring and other productivity gains, aiming for a leaner workforce to generate greater output per head.
Figure 7: Operating expense has declined following
Figure 8: Total FTE has declined, resulting in income per employee to rise
Funding
Consistent deposit growth continues to reinforce funding strength
Over the last five years APRA data highlights that total Australian deposits have grown by 7.2% compounded annually. Major banks Australian deposits have achieved growth in line with system over the same period (around 6.8% compounded annually).
Major banks’ total deposits have now reached $3.1tr, representing an annualised 6.1% increase for the half. Deposit funding as a proportion of total funding remained in line with the prior half at 69.7%.
This deposit strength has enabled banks to maintain favourable funding positions, supporting their ability to grow lending while preserving margin discipline.
Figure 9: Deposits as a proportion of funding remains strong
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Major Banks Analysis | Half Year | May 2026
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