National Australia Bank (NAB), the country’s third-largest lender by total loans, announced a drop in profit for the June quarter on Friday, driven by rising costs due to inflation and increased competition. Despite this, the bank’s core operating margins remained stable, which led to a positive response from investors, boosting its share price.
NAB, which holds a leading position in business lending and is a significant player in the mortgage market, raised concerns about a decline in its business banking portfolio. The bank reported that “non-performing” loans have reached their highest levels in over two years.
In a limited third-quarter trading update, NAB revealed that its net interest margin (NIM)—a key indicator of bank performance that measures the difference between the interest income generated from loans and the interest paid to depositors—remained unchanged from the first two quarters.
The bank’s underlying profit decreased by 8%, totaling A$1.75 billion ($1.16 billion) compared to the same period last year. However, this figure met analysts’ expectations, based on halving the average forecast for second-half profit provided by market data aggregator Visible Alpha.
Analysts were encouraged by the steady NIM figure, interpreting it as a sign that NAB might successfully navigate the ongoing price war among lenders. Since 2022, rising interest rates and inflation have prompted banks to reduce their margins in an effort to attract more customers.
As a result, NAB’s shares rose by 1.5% by mid-session, aligning with the broader Australian market trend. Investors appeared to overlook some deterioration in the bank’s loan quality, focusing instead on the stability of its core profit metrics.
“Investors are likely reassured by the lack of significant deterioration in NIM, which is helping to maintain market confidence,” noted JPMorgan brokers in a client communication.
Initially, Australian banks had reported that most borrowers were managing repayments despite rising interest rates. However, recent reports, including NAB’s update on Friday, indicate increasing financial stress among borrowers. The bank’s asset quality continued to decline during the June quarter.
NAB disclosed that its ratio of “non-performing exposures to gross loans” rose to 1.31% at the end of June, up 11 basis points since March, marking the highest level since at least September 2021. The bank had not previously published a comparable metric for earlier periods.
This increase reflects a “continued broad-based deterioration in the Business & Private Banking lending portfolio, coupled with higher arrears in the Australian mortgage portfolio,” according to NAB.
NAB, which controls 23% of Australia’s A$1 trillion business lending market, is particularly vulnerable among the country’s Big Four banks to a surge in companies entering external administration. This surge reached a record level in the year leading up to June, according to data from the Australian Securities and Investments Commission.
As of the current exchange rate, one U.S. dollar equals 1.5097 Australian dollars.
