National Australia Bank Balances Growth With Caution

National Australia Bank ((NABZY)) has held its Q2 earnings call. Read on for the main highlights of the call.

National Australia Bank’s latest earnings call conveyed a cautiously upbeat tone, with management highlighting solid underlying business momentum despite notable headwinds. Strong growth in business lending, deposits, and proprietary home lending, alongside high customer advocacy and robust capital and liquidity, underpinned confidence even as one-off charges and higher provisions weighed on reported profit.

Underlying Earnings Resilient Beneath One-Off Charges

Underlying profit excluding the large software capitalization charge rose 6.4% half‑on‑half, while cash earnings ex‑notables grew 2.3%. Management stressed that these figures better reflect the true operating performance, contrasting sharply with the statutory profit decline driven by accounting changes rather than core business weakness.

Revenue Growth and Net Interest Margin Dynamics

Revenue increased 3.1% in the half, supported by volume growth and stronger markets and treasury income. Net interest margin edged up 3 basis points overall, helped by a 3‑basis‑point contribution from the five‑year deposit‑replicating portfolio, partially offsetting lending margin compression.

Business Lending Drives Balance Sheet Expansion

Total business lending gross loans and advances jumped 11.5% year‑on‑year to $306 billion, marking NAB’s strongest business credit growth in three years. Business credit expanded 6.9% in the half, with Business & Private Banking delivering a 5.4% rise in underlying profit, signaling sustained appetite from corporate and SME customers.

Deposit Momentum and Surge in Transaction Accounts

At‑call and transaction balances showed strong momentum, with Business & Private Banking transaction balances up 10.8%. Across Business & Private and Personal Banking, at‑call deposits grew by $14 billion in the half, while new transaction account openings rose roughly 30% in Personal and 31% in Business over two years, supporting funding stability.

Proprietary Home Lending Gains Support Returns

NAB further shifted its home lending mix toward proprietary channels, lifting its share of new drawdowns from 41.4% to 47.7% in the first half. In March, half of home loan drawdowns flowed through proprietary channels, which management said is improving economics and returns in a highly competitive mortgage market.

Customer Satisfaction and NPS Reach Record Levels

Customer metrics improved materially, with NAB winning the Roy Morgan Major Bank of the Year 2025 award. Net Promoter Scores turned positive across all four main segments for the first time, including a 16‑point lift in medium and large business, a 14‑point rise in high‑net‑worth and mass affluent, and 5‑point gains in mass consumer and micro/small business.

Technology Modernisation and AI Boost Productivity

The bank advanced its technology overhaul by completing migration of payments to a cloud‑based real‑time engine and installing a cloud transaction switch ahead of card migration by FY27. AI tools have been rolled out to over 7,000 software engineers, which management said is improving developer productivity and accelerating delivery cycles.

Capital Strength, Liquidity and Dividend Policy

NAB reported a March CET1 ratio of 11.65%, above its >11.25% operating target and regulatory minimums. A 1.5% discounted DRP with partial underwriting should raise about $1.8 billion, adding roughly 40 basis points to CET1 to around 12.05%, while an interim dividend of $0.85 represents a 72.5% payout of cash earnings excluding notables, in line with policy.

Costs, Productivity and Investment Mix

Operating expenses excluding the notable charge fell 0.5% half‑on‑half as the bank delivered $199 million of productivity savings, aiming for more than $450 million for the full year. Investment spending is expected to be around $1.8 billion in FY26, with a growing share expensed rather than capitalised, signalling higher ongoing reported operating costs but continued transformation.

Liquidity and Funding Positions Remain Robust

Liquidity coverage and stable funding ratios remained comfortably above regulatory floors, with the LCR at 132% and NSFR at 116%. Term funding issuance reached $19.6 billion in the half, and management expects around $36 billion for the full year, underscoring ample access to wholesale markets despite global volatility.

One-Off Software Capitalisation Charge Hits Statutory Profit

A change in software capitalisation policy triggered a one‑off accelerated amortisation charge of $1.35 billion through operating expenses in the first half. This materially reduced statutory profit and lifts the proportion of investment spend taken through the P&L, with the bank guiding to an operating‑expense ratio of about 50% for such investment in the second half.

Statutory Profit Declines Despite Core Strength

Statutory profit fell 18% in the half, largely due to the $1.35 billion software amortisation charge, partially offset by gains from selling the remaining 20% stake in MLC Life. Management argued that, excluding these notable items, core profitability and franchise momentum remain solid, which is key for investors comparing headline and underlying performance.

Higher Credit Impairments Reflect Cautious Stance

NAB booked a $706 million credit impairment charge in the half, equivalent to 18 basis points of gross loans and advances and $221 million higher than the prior half. This includes a $300 million forward‑looking top‑up, reflecting increased caution around downside risks rather than an observed spike in broad portfolio stress.

Provision Overlays Strengthened Against Sector Risks

Forward‑looking collective provisions were increased by $300 million, lifting collective provisioning to about 1.35% of credit risk‑weighted assets and total provisions to roughly 1.68%. The bank raised the weighting of downside economic scenarios to 45% and applied overlays to sensitive sectors including agriculture, transport and storage, manufacturing, construction and commercial real estate.

Asset Quality Impacted by a Few Large C&I Exposures

The impaired asset ratio rose 4 basis points in the half, driven mainly by a small number of single‑name exposures in Corporate & Institutional Banking. Management signalled that the impaired ratio could stay elevated in coming months, though they emphasised that issues are concentrated rather than widespread across the portfolio.

Macro and Geopolitical Uncertainty Shapes Risk Appetite

Management highlighted the conflict in the Middle East as a source of market volatility, higher fuel costs and supply chain disruptions. They noted weakening consumer sentiment and potential cash‑flow stress for some customers, which has led the bank to strengthen the balance sheet proactively through higher provisions and robust capital buffers.

Margin Pressures Persist Across Lending Books

Despite the overall NIM increase, lending margin compression shaved about 4 basis points from margin, split between Australian home lending and business lending. Competitive pricing and timing differences between cash rate movements and customer rates were cited as key drivers, suggesting ongoing pressure on spreads even as deposit hedges support NIM.

FX Headwinds from New Zealand Dollar Depreciation

The depreciation of the New Zealand dollar reduced half‑on‑half revenue by about $81 million, dampening reported growth from the bank’s BNZ operations. The weaker NZD also contributed to a small drag on CET1, with management pointing to an approximately 8‑basis‑point negative net FX translation effect on capital ratios.

Capital Actions Highlight DRP Strategy and Cost Mix

The decision to apply a 1.5% DRP discount and partially underwrite the plan underscores a focus on bolstering CET1, even from an already strong base. While capital ratios sit above targets, this move effectively defers prior expectations of DRP neutralisation and comes as technology, salaries and the new capitalisation policy lift the structural level of operating expenses.

Guidance and Outlook Emphasise Resilience with Caution

Management’s guidance underscored resilient near‑term performance, with underlying profit up 6.4%, revenue up 3.1% and NIM supported by an estimated additional 5‑basis‑point benefit from the deposit‑replicating portfolio in the second half. They reiterated productivity goals above $450 million for the year, planned investment of around $1.8 billion with about half expensed, and stable liquidity and funding positions, while maintaining elevated provisions and capital buffers in light of macro uncertainty.

NAB’s earnings call painted a picture of a bank balancing strong franchise momentum with prudent risk management as conditions grow more volatile. Underlying earnings, business lending and deposit growth looked healthy, yet one‑off charges, higher impairments and margin pressures tempered the headline results, leaving investors to focus on the sustainability of core performance and the discipline of its capital and cost actions.