National Australia Bank Balances Growth With Rising Risks

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 struck a cautiously upbeat tone, balancing solid operational momentum with a frank acknowledgement of rising risks. Management highlighted strong business lending, robust deposit growth, improved proprietary home lending and better customer advocacy, but these positives were tempered by a large one‑off software charge, higher provisions and a murkier macro backdrop.

Underlying Profit and Cash Earnings Ex-Notables

Underlying profit excluding the large software capitalization charge rose 6.4% half-on-half, underscoring the bank’s solid core performance. Cash earnings stripped of the notable item grew 2.3%, suggesting that day-to-day profitability remains resilient even as reported statutory results look softer.

Revenue Growth and Net Interest Margin Dynamics

Revenue expanded 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 tailwind from the five-year deposit hedge portfolio, even as some lending lines experienced margin compression.

Business Lending Drives Balance Sheet Expansion

Business lending continued to be a standout, with total business GLAs up 11.5% year-on-year to $306 billion, marking the strongest annual growth in three years. Business credit grew 6.9% in the half, helping Business & Private Banking deliver a 5.4% increase in underlying profit.

Deposit Momentum and Transaction Account Growth

At-call and transaction deposits showed strong momentum, with transaction account balances in Business & Private Banking up 10.8%. Across Business & Private and Personal Banking, at-call balances rose by $14 billion in the half, while new transaction account openings are up around 30% over two years in both Personal and Business segments.

Proprietary Home Lending Share Gains

NAB continued to shift home lending toward its own channels, lifting proprietary drawdowns from 41.4% to 47.7% in the first half. In March, fully half of new home loan drawdowns flowed through proprietary channels, supporting better economics and returns on the mortgage book.

Customer Satisfaction and NPS Improvements

Customer metrics improved materially, with NAB winning the Roy Morgan Major Bank of the Year 2025 customer satisfaction award. Net Promoter Scores turned positive across all four segments for the first time, driven by strong gains in medium and large business, high net worth and mass affluent, and solid improvements in mass consumer and small business.

Technology Modernisation and AI Adoption

The bank advanced its technology agenda, 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 more than 7,000 software engineers, improving developer productivity and shortening change delivery cycles.

Capital, Liquidity and Dividend Settings

NAB’s capital and liquidity positions remained robust, with a March CET1 ratio of 11.65%, comfortably above targets and regulatory minimums. An interim dividend of $0.85 per share equates to a 72.5% payout of cash earnings excluding notables, while a discounted and partially underwritten DRP is expected to boost CET1 to around 12.05% on a pro forma basis.

Cost Control and Productivity Outcomes

Operating expenses excluding the notable item fell 0.5% half-on-half, supported by $199 million of productivity savings in the period. Management reiterated a full-year productivity target above $450 million, though it also signalled sizeable ongoing investment, with FY26 spend expected around $1.8 billion.

Liquidity and Funding Strength

Regulatory liquidity buffers remained well above requirements, with an LCR of 132% and an NSFR of 116%, underlining strong funding resilience. The bank issued $19.6 billion of term funding in the first half and expects about $36 billion for the full year, maintaining diversified market access.

One-Off Software Capitalisation Charge

A change in software capitalization policy triggered a one-off accelerated amortization charge of $1.35 billion through operating expenses in the half. This materially depressed statutory profit and will push a higher proportion of future investment into operating expenses, with the OpEx ratio expected to sit around 50% in the second half.

Statutory Profit Hit by Notable Item

Statutory profit fell 18% in the half, largely reflecting the sizeable software amortization charge. This was only partly offset by a gain on the sale of the remaining 20% stake in MLC Life, highlighting the gap between underlying operating trends and headline profit.

Higher Credit Impairments and Conservative Provisioning

Credit impairment charges rose to $706 million, or 18 basis points of gross loans, up $221 million compared with the prior half. The total included a $300 million forward-looking top-up related to downside risks from conflict in the Middle East, signalling a more cautious stance on credit risk.

Increased Provisions and Sector Overlays

Forward-looking collective provisions increased by $300 million, taking collective coverage to about 1.35% of credit risk-weighted assets and total provisions to roughly 1.68%. The bank also tilted its economic scenarios more heavily to downside outcomes and added overlays for sectors such as agriculture, transport, manufacturing, construction and commercial real estate.

Asset Quality and Corporate Exposures

The impaired asset ratio rose by 4 basis points in the half, driven mainly by a small number of single-name exposures in Corporate & Institutional Banking. Management cautioned that impaired levels may stay elevated in the coming months, even though broader portfolio asset quality remains manageable.

Geopolitical and Macro Uncertainty

Management highlighted that conflict in the Middle East is creating volatility, higher fuel costs and supply disruptions, weighing on consumer sentiment. The bank flagged potential cash flow stress for some customers and framed its higher provisions and capital buffers as proactive defensive steps.

Lending Margin Pressures

Despite the modest overall NIM uplift, lending margins came under pressure, contributing around 4 basis points of margin compression. Australian home lending and business lending each shaved about 2 basis points, reflecting intense competition and timing mismatches between cash rate moves and customer pricing.

FX Headwinds from New Zealand

The depreciation of the New Zealand dollar acted as a modest drag on reported performance, trimming revenue by roughly $81 million half-on-half. It also detracted around 8 basis points from the CET1 ratio through translation effects, partially muting otherwise solid capital generation.

Capital Actions and DRP Strategy

The decision to offer a 1.5% discount on the dividend reinvestment plan and to partially underwrite it underscores ongoing capital management pressures. While capital levels remain above target, these actions effectively defer prior expectations of DRP neutralisation until earnings and conditions allow more flexibility.

Higher Ongoing Operating Expense Mix

Underlying operating costs are being reshaped by higher technology and investment spending, including cybersecurity, cloud usage and modernization, alongside rising salary costs for additional bankers. The revised software capitalization approach will lift the proportion of investment that flows through the income statement, raising reported OpEx over time.

Guidance and Forward-Looking Outlook

Management’s outlook centres on maintaining momentum in business lending, deposits and proprietary home lending while continuing to invest in technology and productivity. They expect further NIM benefit from the deposit replicating portfolio, ongoing cost discipline against a roughly $1.8 billion investment program, and stronger capital ratios aided by DRP actions, all while keeping provisioning conservative amid macro uncertainty.

NAB’s earnings call painted a picture of a bank with healthy core growth, stronger customer engagement and ample capital and liquidity, but also one bracing for a tougher environment. For investors, the key watchpoints will be how quickly the one-off software hit fades, whether credit quality stabilizes and if margin and cost initiatives can sustain earnings momentum through the next phase of the cycle.