- Lending
- This chapter provides an overview of evidence provided by the four major banks on home and business lending. Following comments on the overall regulatory environment, areas covered include overall home loan profitability, the Australian Government 5% Deposit Scheme and offset accounts; growth in small and medium business lending; and large business and industrial sectors – including agribusiness, housing and clean energy.
Regulatory framework
4.2Australian retail and business lending is underpinned by Basel III, a global regulatory framework for banks developed in response to the global financial crisis of 2007–09. Under Basel III, and in a small to medium sized nation, Australian banks must hold higher levels of capital than international counterparts for their retail and business lending.
4.3In Australia, the Australian Prudential Regulation Authority (APRA) requires ‘banks and other authorised deposit taking institutions to fund themselves with a minimum amount of capital’ to protect depositors from the risk of a bank becoming insolvent. To determine the amount of capital, APRA sets a minimum capital adequacy ratio which is calculated as eligible capital divided by its risk-weighted assets (RWA). RWAs are used to ‘link the minimum amount of capital that banks must have, with the risk profile of the bank’s lending activities’. Government bonds and residential mortgages are risk weighted at a much lower level than unsecured loans and small business lending.
4.4Most loans made by Australian banks remain on their balance sheet. Australia and New Zealand Banking Group Limited (ANZ) stated that this was not unique to Australia, but Australia sits at the ‘extreme point’. On Australia’s approach to lending for housing and business, Mr Nuno Matos, Chief Executive Officer (CEO) of ANZ commented:
The financial system in Australia is unquestionably strong, and those are APRA settings. I would say, very simply: that's not wrong or that's not right; that's a choice. It's a system that is very safe. And that's great, to be clear. That has a lot of benefits, including the fact that we can always have this perception that our system is one of the safest in the world.
Home loans
4.5Home loans remain an important part of lending for Australian banks. The 5% Deposit Scheme has allowed more Australians to enter the housing market, and mortgage delinquencies and defaults have decreased. Despite the increase in house prices and continued trends in lending, Australian banks have raised concerns about home loan profitability.
Loan profitability
4.6The CEOs of Westpac, Commonwealth Bank of Australia (CBA) and ANZ each noted a long-term decline in home loan profitability. Mr Matos commented that:
Not all mortgages are profitable. Mortgages were much more profitable 15 years ago—three times more profitable than they are today. Today mortgages in Australia are probably one of the least profitable businesses that banks do today. Some mortgages are quite profitable, especially if one originates them, and if the customer really becomes a customer.
4.7Westpac concurred with ANZ and reported that the banking industry’s net interest margin had declined by 55 basis points over a 25-year period despite significant increases in housing prices. Mr Ryan Zanin, Chief Risk Officer at Westpac, notedthat even though banks have increased their absolute revenue from issuing larger loans, the basis points for net interest margins have declined, which impacts a loan’s profitability.
4.8Westpac commented that the bank makes a return on mortgages, but that it also needs to be consider the costs of running the bank, the cost of capital held needed to support the loan and the return made through interest payments made on the loan. For these reasons, increased revenue does not equate to more profitability for the bank.
4.9CBA explained that every time a loan is issued, a bank needs to set aside capital for expected and unexpected losses. For example, if CBA issues a $500,000 home loan, the bank sets aside approximately $15,000 of capital for that loan; however, if the loan falls behind, the bank has to hold and set aside $100,000 for it. CBA stated that there are only two sources of capital for unexpected losses: generation of profit as an institution or asking the shareholders and investors for money.
Responsible lending, the 5% Deposit Scheme and hardship rates
4.10CBA and Westpac advised the committee about their responsible lending practices, including home loan interest and credit quality. Mr Matt Comyn, CEO of CBA, noted that ‘responsible lending applies to all consumers from a residential lending perspective’ and that responsible lending practices are carefully managed and monitored. Westpac similarly detailed their processes to ensure borrowers can sustain servicing a loan.
4.11National Australia Bank (NAB) stated that the bank was examining its housing lending practices. The bank advised that it was previously difficult for customers to obtain a home loan for smaller dwelling units including one-bedroom and studio apartments. Group CEO Mr Andrew Irvine indicated that the re-examination was due to the rising cost of housing and smaller size of households.
4.12CBA informed the committee that housing credit was running at six per cent, and possibly higher for investors, and that there has been increasing demand for housing since 2014. The bank suggested that a slightly lower level of credit may be preferrable for long-term financial stability, equality and access to the housing market. Deposits of under 20 per cent require lenders mortgage insurance which could cost thousands of dollars and, regardless of government support for deposits, the more someone borrows, the more they pay back.
4.13Some members of the committee raised concerns based on reports that mortgages issued under the 5% Deposit Scheme were at greater risk of hardship. Although CBA agreed that people accessing the Scheme may be taking on more risk compared to others not in the Scheme, Ms Monique Macleod, Group Executive, Marketing and Corporate Affairs at CBA was pleased to note that participants in the Scheme were slightly below 90-days arrears rates of CBA’s overall home loan portfolio.
4.14Leaders of Australia’s major banks advised that delinquency and loss rates on home loans overall had declined in the previous year. Westpac CEO, Mr Anthony Miller, stated:
Encouragingly, 90-day mortgage delinquency rates have declined to 0.73 per cent on our mortgage book of over 1.6 million customers. Pleasingly, 75 per cent of our customers who enter hardship situations move out of hardship within three months with support from the bank. We have seen hardship applications slightly down year on year, which is a positive indicator of the easing cost-of-living pressures.
4.15NAB similarly projected that hardship and delinquency will improve over the course of 2026.
Home loan offsets
4.16CEOs from Australia’s four major banks discussed home loan offset accounts in the context of a planned investigation from the Australian Securities and Investments Commission (ASIC). ASIC’s 2025–26 Corporate Plan set out that the Commission would conduct ‘surveillance on offset accounts linked to mortgages to assess whether customers are receiving benefits from these accounts’.
4.17Westpac reported to the committee it was cooperating with the ASIC investigation and that the Commission was soliciting and receiving information from the bank. Westpac advised that in the last year it had ‘done a lot of work’ on its offset accounts and now offers multiple offset accounts options to their customers, but there may be instances or reasons as to why customers have not activated offset accounts. On accountability, Mr Zanin stated ‘if we find that we have any error resulting from inaction or wrong action on our part, we will stare in and look to remediate that’. He told the committee that Westpac will share their learnings with ‘everybody who is part of that ecosystem’.
4.18ANZ acknowledged that the bank has had previous issues with their offset accounts stating, ‘the linkage between offset accounts and mortgage accounts, in the way that the offset was working as intended and as announced to customers’. ANZ remarked that all but one of the offset account issues had been identified and remediated, and the outstanding issue will be remediated by March 2026. The bank is looking to ensure the right controls are in place so that the issues do not recur.
4.19CBA advised the committee that the bank had ‘proactively identified an issue relating to how some of their offset accounts had been established and linked’. Consequently, CBA notified ASIC and commenced a program of work on their accounts.
Small and medium business lending
4.20The banking industry is eager to grow small business lending in the Australian economy. Small and medium-sized enterprise (SME) lending has become the ‘the hottest part of the market, in terms of intention of the industry to grow’. This represents a trend change in lending practices in the Australian banking system.
4.21In the 1980s and 1990s, ‘commercial lending was the dominant business practice’ accounting for at least half of a bank’s balance sheet. Stresses in the early 1990s led to a recalibration of risk and tighter lending conditions for business and commercial style lending. These stresses led to more home loans being issued than business loans.
4.22Australia’s major banks reported growth in their business lending to SMEs. Westpac, ANZ and CBA reported increased and sustained growth in their SME loan books. Westpac reported 22 per cent growth in the 2025 Financial Year as well as SME growth in their loan book for the first time in three years. Likewise, CBA informed the committee that the bank was rapidly growing its SME lending at more than ten per cent and their loan book has increased consistently over the past four years.
4.23ANZ commented that its small business portfolio grew ‘around three, four or five per cent. It was not flat’. Although the portfolio grew, Mr Matos was critical of ANZ’s performance and acknowledged ‘our peers did a better job than us’.
4.24Westpac noted stronger growth in the larger end of its SME portfolio, stating that these businesses were borrowing to invest in new equipment, new processing and to lift the productivity and performance of their businesses. In contrast, Westpac observed that small businesses are primarily ‘navigating’ through the short term and not looking to invest in the long term.
4.25NAB differentiated itself from the other banks and stated that its balance sheet is 56 per cent residential home lending and 44 per cent business lending, making it the largest SME business lender in the country. The bank reported that a survey of small business owners found that 37 per cent of respondents had identified ‘government policies and regulation’ as one of their primary concerns. NAB stated that the bank regularly received feedback from its customers about ‘the need to move faster to reduce complexity and red tape’.
4.26Mr Irvine commented that, over the past five years, the bank has grown its business portfolio at double the pace of its housing portfolio. Not only is NAB’s business portfolio showing strong growth, 80 per cent of its business customers have elected to maintain their loan repayments at higher amounts. This means that more money is being paid down on the principal and less towards interest, a sign, NAB asserts, that ‘middle Australia is actually doing quite well’.
4.27Banks reported that although many businesses may be experiencing higher wage costs, there has been an overall decline in stress levels, delinquencies and defaults. However, ANZ did express concern for and acknowledge the pressure that inflation puts on SMEs.
4.28Although banks reported growth in their SME lending, several noted that this was at a slower pace than big business lending. CBA explained to the committee that ‘small businesses face greater structural challenges than larger firms’ and the business conditions and confidence for small enterprises remain low. ANZ similarly described that ‘SMEs have faced ongoing cost pressures and supply chain challenges, leading many to strengthen cashflow resilience and reduce debt exposure’.
4.29In response to a question about how to unlock more capital, especially for SMEs, NAB recommended to the committee that Australia needed to increase its presence in the venture capital and private equity markets. An increased presence in the market will enable growth companies and companies seeking to scale to access growth capital. Mr Irvine noted the Australian Business Growth Fund and other potential solutions but stated, ‘I think we still have a fair way to go there’.
4.30Each of the banks provided information to the committee about the range of digital platforms, streamlined loan approval processes and other programs which they have implemented to support lending to SMEs.
Large business and industrial sectors
4.31Australia’s four major banks discussed their large business and industrial sector lending, with evidence focused largely on the housing, clean energy and agribusiness sectors.
Agribusiness
4.32NAB told the committee that it was proud to support one in three Australian farmers through its agribusiness lending. NAB reported that farmers are working to improve their yields whilst managing and optimising their costs. The bank stated its agricultural customers were doing well, commodity prices were constructive, harvests were good, and the price of livestock was robust:
Australia's agriculture is some of the best in the world, and our farmers are very, very innovative. In fact, if I could think of any industry in our country where we have really good technology adoption and innovation and entrepreneurship, I'm hard pressed to find a sector that does a better job than the agricultural sector.
4.33Some NAB customers have reported difficult conditions due to floods in northern Australia, New South Wales and Queensland, and droughts in parts of Victoria and South Australia. Some customers were struggling to pay for feed for their livestock. The bank viewed these circumstances as a momentary issue and informed the committee that it was supporting its affected customers.
4.34The corporatisation of Australian farming was identified as a potential issue. NAB stated that Australian farms are becoming bigger and more sophisticated and opined that perhaps larger farms were better able to optimise economies of scale, adoption of technology and other innovations better than smaller ones. Conversely, NAB also stated there were still many farms that were family-driven and passing to the next generation.
Clean energy projects
4.35The Australian banking sector has increased its financing of clean energy projects. The Clean Energy Finance Corporation has partnered with each of the four major banks on their loan programs and funds. Programs include the Household Energy Upgrade Fund which funds homeowners to fast-track transition to clean energy and asset finance programs to provide small scale finance programs for homes, cars, businesses and farms.
4.36Westpac reported to the committee that the bank was the largest renewable energy financier in the Australian marketplace. The bank stated that 89 per cent of all money loaned for power generation in Australia is for renewable energy. Renewable energy technology, such as solar panel construction, is considered low-risk and super funds and passive investors are often willing to back solar energy initiatives.
4.37The major banks have invested heavily into Australia’s clean energy sector, including through the following programs:
- Westpac invested $2.4 billion in Q1 of 2025 into six major battery storage projects and continued investment into residential solar panels. The 2025 figures follow record investment in the clean energy sector in 2024 of $12.7 billion including $9 billion for large-scale energy generation.
- CBA has increased the financing of large-scale storage projects over an 18-month period, including the Akaysha Energy’s Elaine Battery Energy Storage System in Victoria. CBA partially financed the $460 million facility.
- ANZ has established a target to invest $100 billion into renewable and social investments. In 2025, ANZ has committed $84.5 billion of that funding.
Housing projects
4.38NAB signalled its intention to deploy increased capital over the next five years to increase Australia’s housing supply. The bank told the committee that it would use its own balance sheet and work with third-party capital providers to increase housing supply.
4.39NAB also informed the committee that it had set itself an ambitious target to provide $60 billion in housing finance by 2030. The Housing Affordability Financing Ambition will be split equally between supporting first home buyers partially financed by Australian Government schemes and NAB funding for new housing supply nationwide. NAB projects that $30 billion of the funding will be allocated to boost the supply of commercial real estate development projects and specialist accommodation, including build to-rent’. The funding is designed to support 55,000 first home buyer loans and the development of 50,000 homes across Australia.
4.40CBA and NAB both highlighted the rising importance of modular housing in their housing project financing. Modular housing ‘involves the use of prefabricated components that are constructed off-site in a home build’.
4.41NAB remarked that modular housing can be built quickly and to a high quality, and that it could be used successfully in future housing projects. However, the bank also expressed concern that current insurance models do not adequately cover modular home construction, which is an impediment to lending.
4.42CBA identified modular housing as a priority for the bank. Mr Comyn stated that CBA had made changes to its retail lending policy to make it easier for its customers to be approved for financing to purchase a modular home because the land a home is built on often retains its value.
Committee comment
4.43The committee notes the concerns raised by banks about the long‑term decline in home loan profitability. While profitability challenges fall primarily on financial institutions, the committee considers it important that lending models remain sustainable so that borrowers retain access to affordable and competitive home finance from the major banks.
4.44The committee is encouraged by the declining delinquency rates for home loans and welcomes the assurance that there is no evidence of higher hardship or delinquency rates among the 5% Deposit Scheme cohort than in the broader mortgage portfolio. It will watch with interest developments with mortgage offset accounts, particularly as ASIC undertakes its planned investigation.
4.45The committee acknowledges the encouraging growth in small and medium business lending reported by banks. The committee welcomes this trend and supports continued efforts by the banking sector to provide accessible and timely finance to its small and medium business customers.
4.46In the large business and industrial sector, the committee notes significant investments being made by Australia’s major banks into a range of clean energy projects. The committee is encouraged by the partnerships formed with the Clean Energy Finance Corporation and by the banks’ efforts to diversify funding across residential, commercial and industrial initiatives.
4.47The committee encourages the banks to continue to work on overcoming challenges in funding of home loans for modular housing, given its potential to boost affordable housing supply. The committee notes evidence that limitations in existing insurance models for modular construction can impede lending, despite the underlying quality and speed of delivery of such housing. The committee considers that addressing these insurance-related constraints will be critical to unlocking greater investment in modular housing at scale. This may require closer engagement between banks, insurers, and relevant regulators to ensure that insurance products, risk frameworks and lending policies appropriately reflect the characteristics and risk profile of modern modular construction. Overcoming these challenges would support innovation in housing delivery and contribute to improved affordability outcomes.