How Does CBA’s 12.3% CET1 Ratio Signal Strength Amid Regulatory Changes?

Capital Strength and Regulatory Compliance

The Commonwealth Bank of Australia (CBA) has released its comprehensive Basel III Pillar 3 Capital Adequacy and Risk Disclosures for the half-year ended 31 December 2025. The report underscores the Group’s strong capital position, with the Common Equity Tier 1 (CET1) ratio holding steady at 12.3%, comfortably above APRA’s minimum regulatory requirements. Total capital ratio stood at 20.6%, reflecting a robust buffer that supports the bank’s credit rating and market confidence.

Leverage ratio, a non-risk-based measure designed to limit excessive borrowing, remained stable at 4.7%, well above the 3.5% minimum for Internal Ratings-Based (IRB) banks like CBA. This stability is notable given the bank’s ongoing lending growth and dividend payments during the period.

Liquidity and Funding Metrics

Liquidity metrics also reflect prudent management. The Liquidity Coverage Ratio (LCR), which measures the bank’s ability to meet short-term cash outflows under stress, averaged 132% in the December quarter, exceeding the 100% regulatory threshold. Meanwhile, the Net Stable Funding Ratio (NSFR), assessing longer-term funding stability, improved slightly to 117%, supported by growth in retail and SME deposits and wholesale funding.

Risk Weighted Assets and Credit Quality

Risk Weighted Assets (RWA) increased by $9.2 billion to $505.3 billion, driven primarily by volume growth in commercial lending, domestic residential mortgages, and New Zealand portfolios. Credit risk RWA rose by 2.6%, partly offset by improvements in credit quality and lower interest rate risk in the banking book following the adoption of the revised APS 117 framework effective 1 October 2025.

Non-performing exposures decreased by 5% to $10.5 billion, supported by lower arrears in residential mortgages and corporate portfolio upgrades. Specific provisions for credit losses declined slightly, reflecting strong housing market conditions and selective improvements in corporate credit quality.

Regulatory Changes and Capital Initiatives

Significant regulatory developments include APRA’s finalisation of amendments to phase out Additional Tier 1 (AT1) capital instruments from 1 January 2026. CBA will replace the current 1.5% AT1 capital with a combination of CET1 and Tier 2 capital, increasing the CET1 minimum requirement to 10.5% while maintaining the total capital requirement at 18.25%. This transition reflects evolving prudential standards aimed at strengthening loss-absorbing capacity.

In New Zealand, the Reserve Bank of New Zealand (RBNZ) introduced new capital settings for ASB Bank Limited, CBA’s subsidiary, including a higher CET1 requirement of 12% and the removal of AT1 instruments, with phased implementation starting in December 2028.

Capital management initiatives during the half included the on-market purchase of shares to satisfy the Dividend Reinvestment Plan and the issuance and redemption of Basel III-compliant subordinated notes, reflecting active capital optimisation aligned with regulatory expectations and shareholder returns.

Risk Management and Governance

CBA’s risk framework remains robust, with a formal Risk Management Approach and a Three Lines of Accountability model ensuring disciplined risk-taking and capital adequacy. The bank’s AA-/Aa2 credit rating underscores market confidence in its credit quality and capital strength. Ongoing stress testing and capital planning support the maintenance of prudent buffers above regulatory minima.