CBA Maintains Robust Capital and Liquidity Buffers Amid Regulatory Changes

• Common Equity Tier 1 ratio steady at 12.2%
• Total Capital ratio at 20.7%, supported by Tier 2 issuances
• Leverage ratio holds at 4.9%, above regulatory minimum
• Liquidity Coverage Ratio averages 127% in Q4 2024
• APRA’s phase-out of Additional Tier 1 capital to commence in 2027

Capital Adequacy Overview

The Commonwealth Bank of Australia (CBA) has published its Basel III Pillar 3 disclosures as at 31 December 2024, presenting a comprehensive view of its capital adequacy, risk exposures, and liquidity metrics. The Group’s Common Equity Tier 1 (CET1) ratio stood at 12.2%, a slight dip from 12.3% six months earlier but comfortably above APRA’s minimum requirement of 10.25%. Total Capital ratio was reported at 20.7%, reflecting a well-capitalised position bolstered by recent Tier 2 subordinated note issuances totaling AUD1.5 billion.

Despite the payment of the 2H24 dividend and an increase in risk-weighted assets (RWA), CBA’s capital buffers remain robust. The Group’s capital management framework continues to balance regulatory demands, rating agency expectations, and shareholder returns, with ongoing share buybacks and dividend reinvestment plans supporting capital optimisation.

Risk Weighted Assets and Leverage

Total RWA increased by 3.2% to AUD482.4 billion, driven primarily by growth in credit risk and operational risk exposures. Credit risk RWA rose 4.0% to AUD385.1 billion, reflecting volume growth in commercial lending, residential mortgages, and New Zealand portfolios. Operational risk RWA also increased due to higher average net interest income amid a rising interest rate environment.

The leverage ratio, defined as Tier 1 Capital over total exposures, held steady at 4.9%, well above the 3.5% regulatory minimum for IRB banks. This stability was achieved despite increased exposures and dividend payments, supported by capital generated from earnings.

Liquidity Position and Funding Stability

CBA maintained a strong liquidity profile with an average Liquidity Coverage Ratio (LCR) of 127% during the December 2024 quarter, exceeding the 100% regulatory threshold. The Group’s liquid asset base, comprising high-quality liquid assets (HQLA) such as government securities and cash, remained well-distributed across currencies and geographies.

The Net Stable Funding Ratio (NSFR) improved slightly to 116%, reflecting growth in retail and SME deposits alongside increased wholesale funding. This ratio underscores CBA’s ability to fund its assets with stable sources over a one-year horizon, aligning with APRA’s prudential standards.

Regulatory Developments and Capital Framework Evolution

APRA’s ongoing reforms are set to reshape the capital framework, notably the planned phase-out of Additional Tier 1 (AT1) capital instruments by 2027. CBA will need to adjust its capital mix accordingly, replacing AT1 with Common Equity Tier 1 and Tier 2 capital while maintaining total capital requirements.

The Group is also preparing for revised standards on Interest Rate Risk in the Banking Book (IRRBB), market risk, and counterparty credit risk, with new requirements effective from 2025 and 2026. These changes will require continued enhancements to risk management and capital planning processes.

Credit Risk and Asset Quality

CBA’s credit risk profile remains stable, with non-performing exposures increasing modestly by 7.1% to AUD10.3 billion. Actual credit losses decreased slightly to AUD290 million for the half-year, driven by lower write-offs in manufacturing and the absence of prior non-recurring losses. The Group’s provisioning levels remain prudent, with total provisions of AUD6.2 billion, balancing collective and individual assessments.

Risk-weighted assets under the Advanced Internal Ratings-Based (AIRB) approach continue to dominate, supported by granular internal risk rating models aligned with external credit assessments. The Group’s credit risk mitigation strategies, including collateral and guarantees, remain integral to its risk management framework.

Securitisation and Market Risk

CBA’s securitisation exposures increased by 11.2% to AUD21.8 billion, primarily through warehouse facilities and holdings of securities. The Group has not engaged in synthetic securitisation in the banking book and maintains a conservative approach to securitisation risk.

Traded market risk RWA decreased by 6% to AUD7.9 billion, reflecting lower exposures and market volatility. The internal model approach continues to underpin the Group’s market risk capital calculations, with no back-testing outliers reported in the latest period.

Outlook and Strategic Considerations

CBA’s capital and liquidity positions remain strong amid a complex regulatory environment and evolving macroeconomic conditions. The Group’s proactive capital management, combined with robust risk frameworks, positions it well to navigate upcoming regulatory changes and market challenges.

Investors and analysts will be watching closely how CBA adapts its capital structure in response to APRA’s AT1 phase-out and the implementation of revised prudential standards. Maintaining credit quality and managing risk-weighted assets growth will be critical to sustaining capital ratios and shareholder returns.

Bottom Line?

CBA’s disciplined capital and liquidity management will be pivotal as regulatory reforms reshape the Australian banking landscape.

Questions in the middle?

• How will CBA adjust its capital mix in response to APRA’s AT1 capital phase-out by 2027?
• What impact will rising interest rates have on CBA’s operational risk and credit risk profiles going forward?
• How might evolving prudential standards on IRRBB and market risk affect CBA’s capital requirements?