BofA Australian Bank Credit Loss Indicator: Pressure remains, signal mixed

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BofA Australian Bank Credit Loss Indicator: Pressure remains, signal mixed

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BofA Australian Bank Credit Loss Indicator

Pressure remains, signal mixed

Industry Overview

Signal for higher credit losses persists 21 July 2026

The BofA Australian Bank Credit Loss Indicator remained weak for a second consecutive Equity

quarter, signalling a deteriorating outlook for the bad debt cycle. However, the breadth Australia

of deterioration narrowed with only two of eight inputs moving unfavourably. Spreads Banks-Multinational/Universal

tightened (both CDS index and BBB spread) and inflationary expectations eased. The

hedonic home value index and inflation gauge remain the primary sources of residual

stress; each deteriorating for a second straight quarter.

Our Indicator’s four-quarter average lead to the credit cycle points to sustained upward

pressure on future bad debt charges. Albeit, the deterioration now appears less broad-

based than previously expected and we see upcoming results supported by provision Matt Dunger >>

overlays. We see higher credit losses as being fully priced for business banks. Our major Research Analyst

Merrill Lynch (Australia)

bank order of preference: ANZ (Buy). NAB (Buy), WBC (U/P) and CBA (U/P). +61 2 9226 5329

matthew.dunger@bofa.com

Exhibit 2: The Australian Bank Credit Loss Indicator suggests ongoing bad debt pressures Aida Pita >>

BofA Australian Bank Credit Loss Indicator vs. the Australian bank bad debt charges Research Analyst

Correlation of 0.88 since 1990 with an average lead of 4 quarters Merrillaida.pita@bofa.comLynch (Australia)

1.4 1.00% Vivek Vasudeo

Data Science Rsch Analyst

1.0 Backtesting < > Actual MLI (UK)

vivek.vasudeo@bofa.com

0.6

0.60%

0.2

-0.2

0.20% Exhibit 1: BDD pressure, factors mixed