National Australia Bank (NAB), the third-largest lender in Australia by total loans, reported a decline in profit for the June quarter as inflationary pressures escalated costs and intensified competition within the financial sector. Despite these challenges, the bank maintained a stable core operating margin, a development that bolstered investor confidence and lifted its share price.
NAB, recognized as Australia’s leading business lender and a prominent mortgage provider, revealed in its third-quarter trading update that the net interest margin (NIM) – a critical indicator of banking performance that gauges the difference between interest earned on loans and interest paid out on deposits – remained steady compared to the first half of the fiscal year. This stability in NIM played a significant role in driving the bank’s shares up by 1.5% during mid-session trading, aligning with the broader Australian market.
However, the bank also flagged concerns regarding its business banking portfolio, where “non-performing” loans reached their highest level in over two years. This rise in non-performing loans highlights the underlying financial stress within the business sector, which has been exacerbated by the prevailing economic conditions. Despite these challenges, NAB’s underlying profit, while dipping by 8% to A$1.75 billion (US$1.16 billion) from the same period the previous year, met market expectations. The profit figure was in line with analysts’ forecasts, which were based on halving the average estimate for the second half of the fiscal year, as compiled by market data aggregator Visible Alpha.
Analysts were particularly encouraged by the steady NIM figure, interpreting it as a positive signal amidst a fiercely competitive environment where banks have been forced to compromise on margins to attract and retain customers. The price war, which has been ongoing since 2022, was triggered by rising interest rates and inflation, prompting lenders to engage in aggressive pricing strategies. JPMorgan brokers, in a note to clients, emphasized that the resilience in NIM was likely to keep the market optimistic about NAB’s performance despite some signs of weakening in loan quality.
Australia’s major banks initially expressed confidence in borrowers’ ability to manage repayments following interest rate hikes. However, recent reports indicate a growing trend of financial distress among borrowers. NAB, in its latest update, acknowledged a further decline in asset quality during the June quarter. The bank reported that its ratio of “non-performing exposures to gross loans” increased to 1.31% as of June-end, marking an 11 basis point rise since March and the highest level recorded since at least September 2021. This increase was primarily attributed to a “continued broad-based deterioration in the Business & Private Banking business lending portfolio,” along with higher arrears in the Australian mortgage portfolio.
The elevated level of non-performing loans underscores NAB’s vulnerability to the ongoing economic challenges, particularly within the business sector. With a 23% share of Australia’s A$1 trillion business lending market, NAB is more exposed than its peers to the surge in companies entering external administration. According to data from the Australian Securities and Investments Commission (ASIC), the number of companies undergoing external administration reached a record high in the year leading up to June. This surge has further strained NAB’s business lending portfolio, contributing to the rise in non-performing loans.
In conclusion, while NAB faces significant challenges due to rising costs, increasing competition, and deteriorating asset quality, its ability to maintain a stable net interest margin offers a glimmer of hope. The bank’s performance in the coming quarters will be closely watched by investors and analysts alike, as it navigates the complexities of the current economic landscape. Maintaining profitability while managing the growing risks in its business lending portfolio will be critical for NAB as it seeks to sustain its position as a leading lender in Australia.
