Australia’s Defence Bank lending strategy buoys strong asset quality

The bank’s problem loans will remain below 0.5%, says Moody’s.

Australia’s Defence Bank is expected to maintain a low level or arrears and strong core capital ratio over the next 12 to 18 months, reports Moody’s Ratings.

Problem loans to gross loans ratio remains well below 0.5%, only spiking to 1% in 2020 during the pandemic. 

High inflation and elevated interest rates will enable the bank to maintain its strong asset quality. Its lending focus on current and previous Australian Defence Force (ADF) personnel under the Defence Home Ownership Assistance Scheme (DHOAS) will also prop up asset quality.

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“ADF borrowers typically have strong job and income stability, and DHOAS subsidies on average cover a substantial portion of monthly interest payments on home loans,” the ratings agency wrote in its latest report of Defence Bank.

The scheme also tilts the bank's loan portfolio toward owner-occupied loans with principal and interest repayments, which Moody Ratings considers to be of lower risk than investor loans or interest-only loans.

Costs have remained below or around similarly-rated mutual peers; whilst profitability has been moderately above the peer group average, according to Moody’s.

Defence Bank’s stable cost management should alleviate the potential pressure on its net interest margin due to competition, it added.