Westpac 3Q26: Strong Credit Profile Supports Resilience Amid Growth Moderation

Highlight

• Resilient earnings performance: Net interest income remained stable at AUD 5.0 billion, despite a 10bps decline in NIM to 1.89%, as strong 7.3% YoY loan growth offset margin pressure.

• Asset quality remained solid: NPL ratio improved to 1.10%, while 90+ day delinquencies declined to 0.58%, indicating improved borrower repayment capacity despite a more uncertain macroeconomic environment.

• Prudent provisioning approach: Impairment charges increased to AUD 0.2 billion, reflecting a proactive build-up of credit buffers rather than broad-based deterioration in asset quality. WBC retains an approximately AUD 2.0 billion buffer above expected losses under its base case.

• Strong capital and liquidity: CET1 ratio remained robust at 12.1%, while LCR and NSFR stood at 134% and 111%, respectively, comfortably above regulatory minimums.

• Recommendation: We remain positive on Westpac’s outstanding bonds and recommend bondholders to hold.

Following our previous 2Q26 Credit Update, Westpac has released its 3Q26 results, providing further insights into its financial performance, asset quality and lending outlook. This update reviews the key developments since our previous assessment.

Previous Article Update: Credit Update: Westpac’s High-Quality Defensive Credit with Compelling Yield Pickup (4.7%–6.3%)

Earnings Remain Resilient Amid Margin Pressure

As shown in Table 1, WBC delivered a stable 3Q26 performance (as of June 2026), supported by continued loan expansion. Gross loans and acceptances rose by 7.3% YoY, while average interest-earning assets grew by 5.5% YoY, reflecting sustained lending momentum. However, net interest margin (NIM) declined by 10bps to 1.89%, primarily driven by tighter spreads amid intense lending competition. This decline was offset by asset growth, keeping net interest income flat at AUD 5.0 billion, while non-interest income remained stable at AUD 0.7 billion.

WBC’s cost-to-income ratio remained stable at 50.9%. Impairment charges increased to AUD 0.2 billion in 3Q26, up from AUD 0.1 billion in 3Q25. This rise was not driven by a broad-based increase in defaults, as stressed exposures as a percentage of Total Committed Exposures (TCE) improved to a low of 1.19% in 3Q26 from 1.33% in 3Q25, indicating an improvement in overall asset quality and a lower proportion of exposures showing signs of credit stress. Instead, the higher impairment charges reflected a pre-emptive and disciplined adjustment to account for a more challenging and uncertain economic environment. Overall, WBC’s 3Q26 results highlight resilient underlying performance, with robust loan growth despite modest margin pressure.

Table 1: WBC Financial Highlight

Asset Quality Remained Resilient Amid Macro Uncertainty

Asset quality remained resilient in 3Q26, with the non-performing loan (NPL) ratio improving to 1.10% from 1.21% in 3Q25. This was supported by a decline in 90+ day delinquencies to 0.58% from 0.75% over the same period, indicating improved borrower repayment capacity. Meanwhile, 86% of mortgage accounts were ahead on repayments, highlighting continued resilience in the mortgage portfolio.

Although total provisions for expected credit losses increased to AUD 5.30 billion (3Q25: AUD 5.07 billion), this reflects a prudent approach to maintaining strong balance sheet buffers amid global uncertainty. WBC also retains an approximately AUD 2.0 billion buffer above expected losses under its base case scenario. This conservative posture is reflected in a provision coverage ratio (collectively assessed provisions to credit risk-weighted assets) increase from 1.25% in 3Q25 to 1.27% in 3Q26 to provide a significant cushion against potential future volatility.

Strong Capital, Liquidity and Funding Profile

WBC’s capital and liquidity positions remained robust in 3Q26. The Common Equity Tier 1 (CET1) ratio has slightly to 12.1%, well above the minimum regulatory requirement of 10.25% and the bank’s post-dividend operating target of above 11.25%. The strong capital position was primarily supported by earnings generation (+38bps), although this was partially offset by dividend distributions (-57bps) and growth in Risk-Weighted Assets (RWA) (-31bps), reflecting ongoing loan expansion and balance sheet growth.

Liquidity metrics also remained resilient, with the Net Stable Funding Ratio (NSFR) at 111% and the Liquidity Coverage Ratio (LCR) at 134%, both well above regulatory minimum regulatory requirement of 100%. In addition, the bank maintained a substantial LCR surplus of approximately AUD $46 billion, providing a strong liquidity buffer against potential market stress and funding volatility.

Funding remains stable, supported by a strong deposit base, with the customer deposit-to-loan ratio at 84% as of 3Q26. The maturity profile was also well diversified with maturities reducing refinancing concentration risk.  Westpac also proactively managed wholesale funding, raising AUD38 billion in long-term wholesale funding YTD. The funding mix remained well diversified across Senior Bonds (54%), Covered Bonds (33%), Tier 2 Capital (8%) and Securitisation (5%) to and providing flexibility for future funding activities.

Outlook: Asset Quality Remains Intact, but Loan Growth Momentum Expected to Moderate

While 3Q26 loan growth remained strong at 7.3% YoY, management guidance points to a moderation in growth momentum ahead. Average monthly mortgage application volumes have declined by approximately 20% since the recent Federal Budget tax changes and by 11% from the previous quarter, suggesting potential headwinds for mortgage growth in the coming quarters.

Accordingly, WBC expects housing credit growth to moderate from 6.8% in FY26 to 4.7% in FY27, before recovering modestly to 5.2% in FY28. Investor lending growth is expected to slow more significantly, from 9.1% in FY26 to 4.5% in FY27 and 4.4% in FY28, while owner-occupier lending growth is forecast to moderate from 5.7% to 4.8% before recovering to 5.6% in FY28 (Table 2).

Overall, we view the expected slowdown as a moderation in lending growth momentum rather than a deterioration in credit quality. 

Table 2: Housing credit growth forecasts (%)

Recommendation

Overall, WBC’s 3Q26 results demonstrate strong credit fundamentals, supported by resilient asset quality, robust capital and liquidity buffers, and a well-diversified funding profile. While the 10bps NIM decline and higher impairment charges reflect ongoing margin and macroeconomic pressures, these remain manageable rather than a material deterioration in asset quality.

Looking ahead, slower housing credit growth and continued lending competition may weigh on earnings momentum. Nevertheless, WBC’s strong balance sheet, asset quality and funding profile continue to support its position as a high-quality and defensive credit.

We recommend existing bondholders to hold and remain positive on Westpac’s outstanding bonds (Table 3 and 4).

Among the recommended bonds, we favour WSTP 5.815% 04Jun2040 Corp (AUD), which currently offers an attractive yield of above 6%. The bond also aligns with our preference for longer-duration AUD bonds.

Table 3: WBC’s Senior Unsecured Bond

Table 4: WBC’s Tier 2 Bond