Commonwealth Bank of Australia

The Business

CBA is Australia's largest bank by deposits, home loans and market capitalisation, built on a franchise where roughly one in three Australians bank primarily through it. The group operates four core divisions: retail banking (home loans, transaction and savings accounts), business banking (SME and corporate lending), institutional banking and markets, and wealth management alongside its New Zealand arm, ASB. Its defining characteristic is a deposit-funded balance sheet: cheap, sticky customer deposits fund the loan book rather than reliance on wholesale debt markets, underwriting a persistent cost-of-funding advantage over peers.

Recent Performance

The shares have re-rated sharply over the past year. Full-year cash profit reached $10.98 billion in FY26 on a record run of market share gains across every core product category, the first time any major bank has achieved this in fifteen years. Earnings momentum has been solid but unspectacular; the re-rating has come almost entirely from multiple expansion, not an acceleration in underlying profit growth. That distinction matters: a share price that rises faster than the earnings supporting it raises the bar for what has to go right to justify holding, or adding to, the position from here.

Outlook

Earnings growth is expected to flatten over the next two financial years as loan impairment charges normalise off cyclically low levels, before reaccelerating from FY29 as provisioning stabilises and margins settle. Return on equity, currently 14.0%, is expected to fade toward the low-13% range over the same period as the current earnings peak gives way to a more normal credit and rate environment. None of this points to a deteriorating business. It points to a business returning to a more typical, still respectable, growth and profitability profile after several years of unusually benign credit conditions.

Key Risks

Three risks sit at the centre of the thesis. First, CBA's price-to-book multiple sits well above its own history and well above every domestic peer; a shift in market attention back toward fundamentals, without any change in earnings, is capable of moving the share price materially. Second, loan losses are running well below what we consider a normal through-the-cycle level, and early signs of rising home loan and personal loan arrears suggest normalisation is already underway rather than a distant risk; a return to more typical loss rates would be a meaningful drag on annual profit. Third, an anticipated RBA rate-cutting cycle over the next two to three years would compress net interest margins, with the impact working through the balance sheet on a multi-year lag rather than showing up immediately.

What to Watch

The thesis-defining event is the February 2027 half-year result, which will show whether loan losses and margins are normalising as expected.

• Feb 2027 1H27 result — confirmation of rising loan losses and margin compression would validate the earnings flattening built into our forecasts.
• 2-3 years RBA rate-cutting cycle — a normalisation in the risk-free rate would work through bank valuations generally, though the direction and size of the net effect on CBA specifically depends on how margins and credit costs move together.

Latest Developments

Management chose not to extend its on-market buyback at current prices in the FY26 result. That decision is worth noting against the backdrop of a management team that has otherwise bought back stock consistently at lower valuations in prior periods.

Company Description

CBA generates roughly 85% of revenue from net interest income, the spread between what it earns on loans and pays on deposits, with the remainder from fees, wealth management and markets activity. Retail banking, anchored by a 25.4% share of home loans, is the largest earnings contributor. Business banking has been the standout performer, with the group posting share gains across every core lending and deposit category, home loans, business lending, deposits, credit cards and household deposits, for the first time in fifteen years. Institutional banking and markets rounds out the wholesale side, while wealth management and the New Zealand subsidiary ASB provide diversification outside the core Australian retail and business franchise.

Where the Growth Is

Business banking market share gains are the most important driver of forward earnings, contributing to CBA's unprecedented run of growth at or above system in all five core categories. The segment's momentum is accelerating as CBA leverages its retail deposit base and digital lending platform to win SME relationships from smaller business banking specialists. We see this as a meaningful incremental earnings lever if it continues, though we assign it only a moderate likelihood of persisting given the intensity of competitive response likely from National Australia Bank, historically the business banking leader.

Competitive Position

CBA's core advantage is its deposit franchise: a 26.4% share of system deposits, the largest of any Australian bank, which funds lending at a structurally lower cost than wholesale-dependent competitors. We estimate this translates into a 20-30 basis point funding cost advantage that persists across the cycle. That advantage compounds through technology investment; CBA's cost-to-income ratio sits meaningfully below every major peer, funded by roughly $2.4 billion in annual technology spending that deepens customer engagement and lowers the marginal cost of each new account. We see no evidence this advantage is eroding. If anything, the trend looks stable to widening, and we would expect it to persist for at least seven to ten years before competitive or regulatory forces meaningfully narrow the gap.

Management & Capital Discipline

Management has funded roughly $2.4 billion a year in technology investment consistently through the cycle, maintained dividend payouts within a 70-80% target range, and delivered on every stated market share priority in recent years, an unusually clean track record for a major bank. Capital has been returned to shareholders through both dividends and buybacks, but management chose not to extend the buyback at current prices in the FY26 result, a departure from its own recent pattern of repurchasing stock at lower valuations.

Financial Position

CBA's balance sheet is a source of strength, not a risk to monitor. Its common equity tier 1 capital ratio of 12.0% sits comfortably above regulatory minimums, and the bank carries a $2.7 billion provision buffer above its central credit loss scenario. Loan-to-value ratios on the mortgage book remain conservative at 40.7% on a dynamic basis. Funding is diversified across deposits and wholesale markets with liquidity coverage well above requirements. The bank could absorb a credit shock materially worse than the global financial crisis before its capital position came under genuine pressure.