Commonwealth Bank of Australia announces SGD 10NC5 Tier 2s at an IPG of 3.40%

Commonwealth Bank of Australia (CBA) plans to issue new SGD 10NC5 Tier 2 subordinated bonds at an initial price guidance of 3.40%, for accredited and institutional investors only. CBA is rated AA- / Aa2 / AA by S&P / Moody’s / Fitch. The new Tier 2s are expected to be rated A- / A2 / A. The bonds are expected to have a first call and reset date of 27 August 2031, and final maturity on 27 August 2036.

Financial highlights

(We express CBA’s financials in its reporting currency – Australian Dollars [AUD].)

FY26 (ended 30 June 2026) revenue growth remained healthy, increasing +6% y/y to $30.2b. Net interest income (NII) rose +7% y/y to $25.6b in FY26, driven by an +8% increase in average non-lending interest-earning assets. Net interest margins (NIM) fell marginally to 2.05% (FY25: 2.08%), though management noted it would have looked more stable excluding the impact of liquid assets. Other operating income increased +4% to $4.6b.

Operating expenses increased +6% from $13.0b to $13.8b, broadly in line with revenue growth. Cost growth generally reflected wage inflation and investment in technology, fraud prevention, and operational resilience. However, this was partly offset by productivity initiatives – CBA management described about $400m in FY26 productivity savings. Cost-to-income ratio improved slightly from 45.7% to 45.5% in FY26.

Credit costs increased but remained low, with loan impairment expense rising +9% y/y to $788m, representing a loan-loss rate of just 8 bps in FY26 (FY25: 7 bps). Management noted that they made higher collective provisions in 2H26 relative to 1H26 (+47% h/h), reflecting the impact of cost-of-living pressures on multiple segments. Nonetheless, actual credit losses remain fairly low and can potentially be offset by continued earnings growth.

CBA generated stronger profitability in FY26. Net profit after tax grew to $10.9b, up +7% y/ from FY25. These primarily reflected the higher revenue mentioned above, with CBA’s expenses increasing by a smaller amount (in absolute terms).

Credit highlights

As mentioned above, asset quality appears to be normalising somewhat, especially from 1H26 to 2H26. Australian home-loan 90+ day arrears increased +10 bps h/h to 0.73%, while credit-card and personal-loan 90+ day arrears rose +7 bps and +31 bps (h/h) respectively to 0.73% and 1.72%. The personal-loan arrears figure was the most notable, as the 1.72% figure now appears to be higher than its prior post-COVID range, though management cited seasonal factors. Nonetheless, we reiterate that realised losses remain modest with little evidence of broad-based stress.

CBA’s strong deposit franchise is supportive for its credit profile, with deposit funding accounts for around 79% of total funding today (FY25: 78%). In any case, CBA maintains strong access to capital markets, helped by its strong investment-grade ratings. CBA’s liquidity coverage ratio stood at 132%, and net stable funding ratio at 115%, both comfortably above 100% regulatory requirements.

CBA remains well-capitalised. Its APRA CET1 ratio declined by -30 bps y/y to 12.0% due to strong credit-RWA growth, but remained comfortably above its 10.25% regulatory requirement. As with other Australian banks, APRA has a significantly more conservative capital framework than most other financial regulators globally. CBA therefore provides an ‘internationally-comparable’ CET1 ratio, which would have been much higher at 18.3%, placing it near the top of its global peer comparison alongside other Australian banks.

Bond comparison

The bonds have an initial price guidance (IPG) of 3.40%. At this 3.40% IPG, the new issue implies a reset spread of around 136 bps based on an estimated 5y SORA-OIS of 2.0435%. However, any tightening from the IPG to the final price guidance (FPG) would reduce both the initial yield and the eventual reset spread.

Table 1 compares the new issue with other outstanding Tier 2 papers. We include Australia & New Zealand Bank (ANZ) and Westpac (WSTP) for Australian bank comparisons, as well as other banks (TD, BNP, ACAFP) which have different geographical exposures but have somewhat similar tenors and credit ratings.

At the 3.40% IPG, the new issue provides some yield pickup over existing Tier 2 papers, which generally trade closer to the 3% level.

• TD 3.125% 05Aug2036 Corp (SGD) provides a close comparison given its very similar call and maturity profile. The TD bond yields around 3.04% today; at the 3.40% IPG, the CBA new issue therefore offers around 36 bps of additional yield and a roughly higher 31 bps wider reset margin, despite carrying stronger ratings.
• ANZ 3.750% 15Nov2034 Corp (SGD) and WSTP 3.000% 19May2038 Corp (SGD) can be considered close comparisons due to their Australian exposure, and similar credit ratings (within 0 to 1 notches of CBA). These two bonds currently yield around 2.70% and 3.09% today, meaning the CBA new issue’s IPG of 3.40% also provides some yield pickup over these peers.

Overall, we consider the new issue modestly attractive at the 3.40% IPG, supported by CBA’s resilient credit profile, strong capitalisation, and modest yield pickup over existing Tier 2 SGD bonds. These bonds would be best suited for conservative investors seeking solid investment-grade bonds for regular income, who are comfortable with the associated risks including subordination and loss-absorption risks.

(Note: Tier 2 Subordinated bonds are capital instruments and come with loss-absorption risks and non-call risks. Based on CBA’s credit profile, we assess non-call risks as low. Tier 2 capital instruments are progressively amortised as they approach maturity, creating an economic incentive to refinance at the first call date.)

Table 1: Bond comparison

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold NIL positions in the abovementioned securities. This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.