Australia's big banks boost provisions as profits grow

Australia's major banks increased credit provisions and maintained earnings growth in the first half of 2026, according to PwC Australia analysis. The review also found the sector held capital buffers of $36 billion above regulatory minimums.

Cash earnings across the four largest banks rose 7.6 per cent to $15.3 billion, while return on equity recovered from a four-year low to 10.7 per cent. At the same time, net interest margin fell three basis points to 1.82 per cent, indicating stronger lending volumes are still offsetting pressure on profitability, but with less room to spare.

Total credit provisions climbed 3 per cent to $22.8 billion, and the loss rate reached its highest level since the pandemic. That increase came even though borrowers have not yet shown significant signs of stress in loan performance data.

Based on recent half-year results from the country's major lenders, the analysis indicated that the sector remains financially sound as it prepares for a more challenging operating environment. Rising macroeconomic and credit risks are beginning to test the cycle as a Middle East-linked supply shock feeds into inflation and household costs.

"Earnings growth continued through the March quarter and the capital position gives the sector resilience, but the competitive dynamics are tightening, margins are under sustained pressure, and banks are clearly preparing their balance sheets for economic conditions that haven't yet shown up in borrower behaviour," said Noel Williams, Banking and Capital Markets Leader, PwC Australia.

"The Middle East supply-side shock will transmit into inflation, living costs and eventually loan performance. The buffers are there, and we'll be watching to see whether they are sized for what's coming," Williams said.

Strategy shift

A common pattern has emerged across the major lenders, with all four leaning further into business lending. That segment now accounts for more than 34 per cent of their Australian loan books, pointing to broad strategic convergence at a time when competition in traditional lending products remains intense.

In mortgages, broker-originated loans continued to dominate. Brokers reached a record share in the December quarter despite sustained investment by banks in their own origination channels.

That combination has narrowed the scope for any one bank to gain a clear edge through strategy alone. When all the largest lenders push into the same market at once, pricing pressure and competition can quickly erode the benefits.

"When four banks converge on a segment simultaneously, the competitive benefit erodes quickly. Brokers are still preferred by mortgage borrowers despite banks' preference otherwise. These dynamics have shifted at the big four, but are not changing at an overall industry level," Williams said.

Efficiency test

The banks also posted stronger efficiency metrics. Cost-to-income improved 350 basis points to 47.9 per cent, and income per employee reached its highest inflation-adjusted level in three years.

That suggests firmer cost control after several years of elevated expenses across the sector. Even so, it remains unclear whether those gains reflect lasting simplification or more favourable cyclical conditions that could reverse if the credit cycle worsens.

Operational strain tends to rise when loan losses increase, particularly in collections, hardship support and remediation work. That means current productivity gains may face a tougher test if household and business borrowers come under greater financial pressure.

"The productivity story is the most encouraging feature of the half. But it remains untested against a full credit cycle. When loan losses rise, so do operational demands. Collections, hardship, and remediation. That's when we'll know if these gains are lasting," Williams said.

Buffers built

Provisioning has risen ahead of any broad deterioration in borrower behaviour. Banks have adopted more pessimistic economic assumptions and added overlays to reserves, even though the Middle East supply disruption has not yet clearly appeared in loan staging data.

Repeated shocks since 2020 have reinforced rather than exhausted the sector's overall provision buffers. That has created what PwC described as a structural floor under coverage levels, giving banks a stronger base as they enter a potentially weaker phase of the cycle.

Even so, the central question is whether those reserves are large enough if inflation and living costs continue to climb. The current position reflects caution by management teams, but the real test may come only once stress moves from macro indicators into loan books.

"Banks are provisioning for deterioration they expect but cannot yet see in their portfolios," Williams said.

"The discipline since 2020 has given the sector a strong foundation. But this cycle's test is still ahead," he said.

PwC Chief Economist Amy Lomas said the fuel supply disruption is adding another layer of uncertainty for lenders and policymakers.

"Supply-side shocks push up fuel, transport and goods prices, and that flows directly into what households and businesses are paying week to week. Banks have built their buffers early, which is the right discipline. But the shock hasn't yet shown up in borrower behaviour. The uncertainty is whether provisions are sized correctly for what's still to come," Lomas said.