When the strongest lender reports rising arrears: CBA’s arrears reach a six-year high and the read-through for private credit

Executive Summary

Commonwealth Bank of Australia’s latest quarterly trading update presents a revealing contradiction in Australia’s credit cycle. The country’s largest lender delivered an unaudited cash profit of approximately $2.8 billion for the September 2026 quarter, an 8% increase on the previous year, while the proportion of home loans more than 90 days overdue climbed to its highest level in approximately six years.

Ninety-day arrears rose from 0.73% to 0.80%, reflecting the cumulative impact of higher borrowing costs, persistent inflation and pressure on household disposable incomes. Loan impairment expense increased to $300 million for the quarter, collective provisions rose by $105 million, and corporate troublesome and non-performing exposures reached approximately $6.9 billion, or 1% of total committed corporate exposures.

For credit and income investors the question is direct. If Australia’s largest and most diversified lender is experiencing rising borrower stress within a relatively conservatively underwritten portfolio, how resilient are private credit managers originating higher-risk loans to borrowers who may not satisfy traditional bank underwriting requirements? The evidence does not establish that private credit defaults will necessarily accelerate. It does suggest that investors should increasingly differentiate between managers on underwriting standards, borrower repayment capacity, collateral quality, credit enhancement, recovery processes and the timeliness of impairment recognition.

The Australian credit environment is moving into a more discriminating phase. The ability to generate high contractual yields will matter less than the ability to preserve those returns after defaults, recovery expenses, impairments and liquidity costs.

Exhibit 1: The Report Card in Numbers

Source: CBA September 2026 quarterly trading update and Basel III Pillar 3 disclosures; Foresight Analytics.

What CBA’s Report Card Reveals

The headline numbers describe a bank whose earnings remain resilient while the quality of its loan book drifts in the wrong direction. Each indicator in the update measures a different stage of credit deterioration, and the diligence value lies in reading them in sequence rather than in isolation.

Exhibit 2: Seven Credit Indicators and What They Signal

The last two measures are drawn from the accompanying Basel III Pillar 3 reporting and are not directly interchangeable with the trading update’s corporate exposure measure or with accounting impairment expense. The more important distinction is conceptual: arrears are an early indicator of payment stress, provisions recognise expected credit losses, and write-offs and realised losses capture later stages of deterioration. These measures should not be conflated.

Are Rising Arrears Becoming Credit Losses?

The data point to deterioration in underlying credit quality, but not yet a broad-based credit-loss crisis. Three aspects warrant closer examination.

First, the deterioration in mortgage serviceability appears to be accumulating. The rise in 90-day arrears from 0.47% in June 2023 to 0.80% in September 2026 suggests that repayment stress has become more persistent rather than confined to isolated borrowers. The September increase also reflected slower resolution through late-stage collections, so not all of the 7 basis point rise should be attributed to new credit deterioration.

Second, expected credit losses are rising faster than loan volumes alone would suggest. The quarterly impairment expense of $300 million compares with an average of approximately $234 million per quarter during the second half of FY2026, an increase of approximately 28%. Annualised, it represents around 11 basis points of average gross loans and acceptances. That is still low, but the direction indicates a less favourable credit cycle.

Third, collateral values are becoming a more important provisioning variable. CBA attributed much of the $105 million collective provision increase to lower housing prices. This matters for private real estate credit because losses depend not only on whether borrowers default, but on how much is ultimately recovered from the collateral.

Exhibit 3: Default Is Not the Same as Loss

Source: CBA Basel III Pillar 3 disclosure summaries; change column calculated by Foresight Analytics. Actual losses are quarterly flows; NPE and provisions are reporting-date stocks.

The rise in non-performing exposures is significant, but actual losses on residential mortgages remain small relative to the stock of troubled loans. That is the benefit of conservative origination and collateralisation: CBA’s FY2026 disclosures showed a residential mortgage dynamic loan-to-valuation ratio of approximately 40.7%, providing substantial aggregate collateral protection.

It does not follow that the same protection exists across private mortgage funds originating at higher LVRs or lending to borrowers with less verifiable incomes.

The Transmission to Private Credit

The bank’s report card is particularly relevant to private credit managers operating outside traditional bank underwriting channels. Low-documentation and alternative-documentation lending is not inherently poor-quality credit; it can be appropriate for self-employed borrowers, business owners and borrowers with irregular income. What matters is the reliability of serviceability verification and the borrower’s ability to withstand an interest-rate shock.

Exhibit 4: How Credit Deterioration Reaches the Fund Investor

How Credit Deterioration Reaches the Fund Investor

Source: Foresight Analytics.

The same pressure reaches each lending segment through a different channel, which is why a single portfolio default rate says little about where the next loss will come from.

Exhibit 5: Where Each Lending Segment Is Exposed

A particularly important risk is borrower and collateral correlation. Self-employed borrowers, SME owners and property developers may experience simultaneous deterioration in operating income, personal cash flow and pledged collateral value. A lender can therefore hold property security that appears adequate, yet face both a higher probability of default and a lower recovery value in the same downturn.

Corporate Lending: The Less Visible Deterioration

The increase in CBA’s corporate troublesome and non-performing exposures to $6.9 billion, or approximately 1% of committed exposures, deserves particular attention. CBA indicated that a small number of single-name downgrades contributed to the increase. That points to idiosyncratic borrower stress as an important feature of the corporate credit cycle, rather than uniform deterioration across all borrowers.

Exhibit 6: When a Performing Loan Is Not Performing Economically

Private credit managers should therefore disclose not only payment defaults but the earlier indicators of distress: covenant waivers, restructurings, extensions, debt-service shortfalls and borrower risk-rating downgrades.

Are Losses Being Recognised Early Enough?

CBA’s reporting provides a useful benchmark for expected credit loss governance. Under the Australian accounting standard AASB 9, financial institutions generally recognise credit deterioration through a forward-looking expected credit loss framework.

Exhibit 7: The AASB 9 Expected Credit Loss Stages

Conceptually, expected credit loss is approximately the product of probability of default, loss given default and exposure at default (ECL ≈ PD × LGD × EAD). More sophisticated models account for the timing of defaults, discounted cash flows and multiple economic scenarios. CBA’s reporting reflects an established framework that incorporates forward-looking credit risk and collateral assumptions.

For private credit funds the appropriate accounting treatment depends on how each financial asset is classified and measured. Not every fund loan is subject to identical AASB 9 provisioning, and fair-value measurement can require a different approach. The economic principle is nonetheless consistent: credit deterioration should be reflected in asset valuations before ultimate enforcement or realised loss, wherever the evidence supports it.

Foresight regards the following as significant diligence red flags: loans held at par despite material deterioration in borrower serviceability; maturities repeatedly extended without a credible exit; collateral not reassessed after adverse market movements; and capitalised or accrued interest treated as equivalent to cash interest received.

Stress-Testing the Portfolio

Higher arrears and impairment charges at the bank level suggest that private credit portfolios should be assessed against forward-looking credit deterioration rather than historic realised defaults alone. The matrix below is an illustrative starting point for diligence, not a forecast of Australian private credit defaults.

Exhibit 8: Illustrative Credit-Loss Scenarios

The headline default rate alone can be misleading. A portfolio with 6% gross defaults and 60% recovery produces an estimated gross loss of 2.4% of assets. If an effective, funded first-loss buffer can absorb 1.5% of the portfolio, the residual loss falls to 0.9%. A portfolio with 10% defaults and recoveries of 45% would lose 5.5% gross, and the same 1.5% buffer would leave 4.0% of the portfolio exposed.

Credit enhancement must be read with the same care. Excess interest margin, loan-level borrower equity, subordinated capital, warehouse credit enhancement and cash reserves cannot automatically be added together. They may protect different parties, absorb losses in a different sequence, or be unavailable when needed.

Distribution Risk Precedes NAV Impairment

Investors should differentiate between capital losses and distribution losses. A fund earning a gross 9% cash yield could see distributions fall if 10% of its loan book stopped paying cash interest, well before any principal write-down became necessary. On that 10%, approximately 90 basis points of portfolio-level annual income is at risk, before recoveries, fees, reinvestment and other offsets.

The fund might continue to report accrued interest or hold its unit price steady while its cash distribution coverage has already weakened. That makes the distinction between cash interest collected, accrued interest, PIK interest and interest-funded distributions especially important.

A stable unit price is not evidence of stable credit. Cash distribution coverage can weaken first, and a fund can keep paying from sources other than collected interest for some time before the valuation catches up.

ASIC’s Findings Reinforce the Warning

The deterioration visible in CBA’s loan book is occurring as ASIC intensifies its scrutiny of private credit governance, valuation, transparency and disclosure. Report 820, published in November 2025, found weaknesses in credit assessment, independent oversight, impairment practices and liquidity stress testing. Report 846, released on 10 November 2026, extends that examination to fund structures, fees, related-party relationships and investor disclosure.

The latest surveillance reviewed 24 retail and wholesale private credit funds managing a combined $18 billion and found that some investors were not receiving adequate information about non-performing or distressed assets. ASIC also identified complex intermediary structures and potentially conflicting financial incentives, and warned that inconsistent definitions of arrears, defaults, loan amendments and impairments make fund comparisons difficult while valuation assumptions can lag economic reality.

Private credit valuations can remain stable while borrower cash flows, collateral values and refinancing prospects deteriorate. Rising bank arrears and ASIC’s findings together make a strong case for borrower-level disclosure of credit performance within private credit portfolios.

The Foresight Credit and Income Diligence Scorecard

The following should form part of enhanced manager reviews for funds with residential mortgage, alt-doc, SME or corporate lending exposures.

Exhibit 9: Credit and Income Diligence Scorecard

Foresight places particular emphasis on arrears migration, stressed LGD, borrower concentration and actual recovery outcomes, rather than on an overall historical default rate or an aggregate weighted-average LVR.

Questions for Private Credit Managers

Each question should be answerable from information a well-run manager already holds; an inability to answer is itself a diligence finding.

Exhibit 10: Five Critical Questions for Private Credit Managers

Diligence Spotlight Takeaway

CBA’s latest report card should not be read as evidence of an impending systemic Australian credit crisis. The bank retains strong profitability, substantial collateral protection, and capital and liquidity buffers: its CET1 ratio was approximately 11.5% at September 2026 and its liquidity coverage ratio remained at 132%. The RBA’s September financial stability assessment also noted that Australian mortgage borrowers generally retained significant equity and savings buffers.

The direction of the indicators nonetheless matters: gradually rising arrears, greater borrower differentiation, higher expected credit costs and growing sensitivity to collateral values. Some private credit managers could face a harder environment than the major banks because of higher-yielding segments, greater concentrations or less liquid collateral and financing. Disciplined managers with strong security, conservative underwriting, genuinely funded first-loss protection and effective workout capabilities may be well positioned to differentiate themselves.

Foresight’s view is that the central risk for private credit investors is not necessarily a sudden surge in system-wide defaults, but a widening divergence between reported income and the underlying economic performance of loan portfolios. Higher arrears may first appear as loan extensions, capitalised interest, renegotiated terms and delayed repayment, and only later as impairment provisions, NAV adjustments, lower distributions and realised losses. As the cycle matures, capital preservation will depend increasingly on three factors: the probability that a borrower defaults, the amount ultimately recovered following default, and the time required to recover investor capital.

The CBA report card strengthens the case for treating private credit primarily as an allocation to underlying borrower, collateral and liquidity risks, rather than simply an allocation to attractive contractual income. That is the critical distinction between sustainable risk-adjusted income and yield that merely compensates for credit losses yet to be recognised.

Source: CBA September 2026 quarterly trading update and regulatory credit disclosures; The Australian, 11 November 2026; ASIC Reports 820 and 846; RBA financial stability commentary. Stress assumptions and private credit implications are Foresight analytical illustrations, not CBA forecasts or evidence of defaults at any particular private credit manager.

About Foresight Analytics & Ratings

Foresight Analytics, an independent Sydney- based firm, provides investment ratings, data analytics, assurance and advisory solutions to leading investment management companies, superannuation funds and wealth groups across the Asia Pacific.

Foresight’s innovative, evidence-based approach blends both human and forensic insights into the analyses of economies, markets, themes, investments products and portfolios. Foresight Analytics was founded in 2015 by Jay Kumar, a former executive of Morningstar, Optimix Investment Management, ANZ Wealth & Private Bank and the Reserve Bank of Fiji.

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