Banks reporting scorecard

Since the GFC (now approaching 20 years ago), Australia’s major banks have delivered consistent profits and grown their market share either by buying smaller competitors or by expanding as foreign banks throw in the towel. Additionally, the banks have simplified their operations, retreating from offshore ventures and non-core businesses, and benefiting from APRA restrictions on riskier lending. However, being an investor in bank shares is anything but dull, with each year throwing up a new worry that is expected to crater bank profits. Over the past few years, we have had Covid-19, the fixed-interest-rate cliff, Donald Trump's "Liberation Day" tariffs, and, in May 2026, rising energy prices and tax changes in the budget.

However, once again, the prophesied (and hoped for by those short the banks) doom and gloom for Australia's banks did not eventuate this May, with all banks growing profits and again revealing minuscule bad debts.

In this piece, we look at the major themes that played out during the May 2026 bank reporting season in the more than 700 pages of financial results released, including regional banks receiving gold stars for their performance over the last six months. Even for investors who don't own banks, looking closely at their results provides a window into Australia's financial health.

Bad Debts Remain Extremely Low

Bad debts remained low in 2026, with all banks reporting extremely low loan losses. Macquarie Bank reported the lowest bad debt ratio, at 0.02% of gross loans, reflecting disciplined growth in its loan book, which was a surprise given Macquarie’s market share gains. Overall, all the big banks reported bad debts of around 0.1% of gross debt, which remains below the 0.3% average post-1992!

The level of loan losses is important for investors, as high loan losses reduce profits and erode a bank's capital base. This reporting season has seen low bad debt levels translate into better-than-expected profits and stable dividends.

Atlas sees that the low level of bad debts is a combination of prudent risk management in the loan book, low unemployment, and more conservative lending than we saw from the banks 2000-07. However, it would be disingenuous to attribute current low bad debts entirely to prudent lending from the banks. APRA's capital requirements announced in 2016 in response to the Basel III reforms to global banking effectively restrict banks from lending to developers that have not pre-sold 100% of their development and have a maximum loan-to-value (LVR) ratio on developments of around 65%. These requirements have led developers to switch to non-bank lenders and private credit funds that are not encumbered by them.

The past year has seen loans to flashy hotel developers, property syndicates, and troubled industrial companies that are impaired now sit with non-bank lenders and private credit funds rather than the big four banks. Indeed, some of these private credit funds have sought to disguise bad debts by converting non-performing loans into private equity stakes. While an APRA-regulated bank would have to recognise this as bad debt, private credit funds have been slow to record it as a loss.

Gold Star: Macquarie Bank

Margin Pressure

Net interest margins are always a major topic during the banks' reporting season, with most investors going straight to the slide on margin movements in the immense Investor Discussion Packs. Banks earn a net interest margin [(Interest Received - Interest Paid) divided by Average Invested Assets] by lending out funds at a higher rate than borrowing these funds from depositors or wholesale money markets.

From the above table, you can see that Westpac and Commonwealth Bank enjoy higher net interest margins than ANZ and NAB due to their higher weighting to mortgages, which enjoy higher net interest margins than corporate borrowers that can canvass banks in Japan or Europe for borrowing needs.

In the first half of 2026, the banks saw small decreases in their net interest margins. All the banks reported higher competition for loans, though this was hard to detect in their financial results, with all banks doing a good job of growing their loan books to offset margin pressure. For example, Westpac's net interest margin decreased by 0.11% over the first half of 2026 to 1.79%. Although it is disappointing to have a lower margin, Westpac was able to grow its loan portfolio by $34 billion over the half, taking its loan book to $890 billion, mainly by growing its business bank loans, which carry a lower margin than mortgages. Following the combination of a lower interest margin and a higher loan portfolio, Westpac's interest income was largely unchanged in the last half, despite the lower margin.

Gold Star: CBA

Restocking the Provisions

While the banks all reported very low bad debts, there was some nervousness about the future, with all banks taking provisions against future losses. Provisions are an expense that reduces current profits and acts as a safety cushion against future losses. These can either be specific provisions that relate to loans made to a particular company, such as a large property developer in Melbourne that went under in December, or may be collective provisions that are taken based on bank internal modelling estimating that if unemployment moves to 6% and house prices fall by 10%, their loan book is likely to incur X million dollars in losses. This is akin to stockpiling capital for a rainy day.

The Australian banks took massive, front-loaded collective provisions for loan losses in the first half of 2020 in anticipation of widespread pandemic-related defaults (and stopped paying dividends for the first time since the 1890s). However, this was followed by a reversal of these provisions in 2021 and 2022 as economic conditions improved, housing prices rose and the expected bad debts did not eventuate.

In May 2026, all the banks increased their provisions, citing business customers’ exposure to surging energy prices. For example, in May, NAB increased its forward collective provisions by $300M, strengthening its balance sheet. All of the banks are well-provisioned for a rainy day, holding billions against bad debts, though the last prolonged downturn in the banking sector is probably fading from banks' corporate memory. Current bank CEO, CFO and risk officers are unlikely to have been on the front lines during the 1991-1992 recession.

All major banks

Dividends/Buy Backs

In the May 2026 bank reporting season, only Westpac announced a modest one-cent increase in its dividend, preferring to restock provisions and build capital, rather than reward shareholders. New share buybacks were nonexistent due to uncertainty about the future and high share prices. The exception to this rule was Macquarie Bank, which increased dividends by 8%, which looks to me to be somewhat parsimonious in light of a 30% increase in net profits.

Gold Star: Macquarie/Bank of Queensland

Regional Banks

The regional banks walked away with a single star, awarded to the Bank of Queensland for its dividend increase. In the past decade, the regionals have not seen many stars awarded. BOQ's 11% dividend increase benefits from timing, as it followed dividend cuts in the prior period.

In Australia, the big four banks dominate with a combined market share of 75%, following ANZ's successful acquisition of Suncorp Bank. The closest to breaking into the market is Macquarie, with close to 6% market share, followed by the two regional lenders, Bank of Queensland and Bendigo Bank, each with 3% market share.

As we have seen in the bank matrix at the top, regional banks face a competitive disadvantage compared to major banks, typically enjoying lower net interest margins and return on equity. This occurs because they have a higher capital cost than the major banks. Here, wholesale funders require higher coupons on their bonds to offset their higher risks and greater geographic concentration. Additionally, the regional banks have limited access to the large pools of corporate transaction account balances that have historically paid minimal interest rates.

Our Take

Overall, we are satisfied with the financial results from the banks owned by the Atlas Australian Equity Portfolio in May. Westpac and Macquarie increased their dividends, albeit by less than we expected. Increasing provisioning on the balance sheet looks prudent as of May 2026, though we may see this written back and boost profits in future years if losses from rising energy prices do not eventuate.

All banks showed solid net interest margins, low bad debts, and good cost control, particularly ANZ Bank and Westpac. In 2026, the banks will all have cleaner loan books, more consistent earnings, and a greater margin of safety than in the past. In a turbulent world with weekly changes in a turbulent geopolitical environment, Australia's major banks are likely to positively surprise the market, operating in a small oligopolistic fishpond, largely sheltered from both new competition and global storms