How Did CBA Boost Its CET1 Ratio Despite Rising Risk-Weighted Assets?

Capital Position Strengthens Despite Asset Growth

Commonwealth Bank of Australia (CBA) has released its Pillar 3 Capital Adequacy and Risk Disclosures for the quarter ended 31 March 2025, revealing a modest but notable improvement in its Common Equity Tier 1 (CET1) capital ratio. The CET1 ratio increased by 45 basis points to 11.9%, reflecting capital generated from earnings that offset the impact of the interim dividend and a rise in risk-weighted assets (RWA).

This increase in CET1 capital is a positive signal for investors, indicating the bank’s ability to grow capital organically even as it navigates a complex risk environment. The Tier 1 and Total Capital ratios stood at 13.8% and 20.7%, respectively, maintaining a solid buffer above regulatory minimums.

Rising Risk-Weighted Assets Reflect Portfolio Growth and Risk Dynamics

Total RWA rose by $2.1 billion to $484.5 billion, driven primarily by increases in credit risk and interest rate risk in the banking book (IRRBB). Credit risk RWA grew by $3.0 billion, fueled by volume growth across commercial, domestic residential mortgage, and New Zealand portfolios, alongside foreign currency effects. However, this was partly offset by improvements in credit quality and reductions in derivatives and standardised portfolios.

Meanwhile, traded market risk RWA declined by 14%, reflecting a more cautious approach to market exposures. The IRRBB RWA increased slightly, indicating ongoing sensitivity to interest rate movements within the bank’s balance sheet. Operational risk RWA remained stable, consistent with the bank’s risk management framework.

Leverage and Liquidity Metrics Remain Robust

The bank’s leverage ratio decreased to 4.7% from 4.9% in the prior quarter, primarily due to the interim dividend payout and higher total exposures. Despite this decline, the leverage ratio remains comfortably above the 3.5% minimum required for advanced internal ratings-based banks like CBA.

Liquidity metrics also showed strength, with the Liquidity Coverage Ratio (LCR) rising to 133%, up from 127%, supported by balance sheet management and strong wholesale funding issuance. The Net Stable Funding Ratio (NSFR) held steady at 116%, reflecting a stable funding profile aligned with regulatory expectations.

Capital Initiatives and Regulatory Compliance

During the quarter, CBA satisfied its Dividend Reinvestment Plan (DRP) for the 2025 interim dividend through on-market share purchases, with an 18.1% participation rate. Additionally, the bank issued USD 1.25 billion in subordinated notes, bolstering its Tier 2 capital base and enhancing overall capital flexibility.

The disclosures comply with the Australian Prudential Regulation Authority’s (APRA) revised APS 330 standard effective from January 2025, aligning with Basel III international frameworks. This transparency supports market confidence in CBA’s capital adequacy and risk management practices.

Looking Ahead

As CBA continues to navigate evolving regulatory requirements and market conditions, the interplay between capital generation, asset growth, and risk management will be critical. The bank’s ability to sustain capital ratios while managing risk-weighted assets and liquidity positions will remain under close scrutiny by investors and regulators alike.