National Australia Bank’s (ASX.NAB) third-quarter underlying profit of $1.8 billion is up 2% on the quarterly average for the first half. Loan growth of 2% more than offset a modest reduction in net interest margins, aided by lower loan impairments. But shares slipped 4%.

Why it matters: We lower our fiscal 2026 profit forecast 2% to $7.3 billion, with benefits to NIM from recent cash rate increases being eroded faster than expected by competition in home lending and deposits. Slowing credit growth likely keeps rate competition high.

  • Rate increases and budget tax changes led mortgage applications to fall 15% from the second quarter, likely hitting credit growth next year. We forecast fiscal 2027 home loan growth of just 2.5%, a sharp pullback from system growth of 6.9% in the year to June 2026.
  • While business credit growth is robust, up 2% in the quarter (8% annualized), higher rates and headwinds for consumers, such as inflation and falling house prices, are headwinds for business credit. Business confidence and investment intentions have weakened, so we forecast business loan growth slows to 5% in fiscal 2027.

The bottom line: We retain our $33 fair value estimate for wide-moat National Australia Bank, with shares 20% overvalued. A forward P/E of 17 and fully franked dividend yield of 4.3% are rich, given our expectation for around 5% average profit growth per year to fiscal 2030.

  • Competitors are chasing business lending given it offers better returns than mortgages, but we think National Australia Bank can hold its market share steady at around 22%. Customer relationships and investment in specialist lenders and digital capability help defend its position.

Between the lines: The balance sheet is sound, with a common equity Tier 1 ratio of 11.93%, higher than management’s target of above 11.25% and leaving it well positioned to invest while steadily increasing dividends. We forecast a final dividend of AUD 85 cents, implying a full-year payout ratio of 72%.

National Australia Bank’s profitability remains robust as it defends business-lending market share

National Australia Bank is one of four major banks operating in oligopolistic Australia and New Zealand markets. It is Australia’s biggest business bank, offering a full range of banking and financial services to the consumer, small business, and corporate sectors, with significant operations in New Zealand.

The bank has consistently held onto its large share of business loans, and continued investment shows a clear intention to retain this position. The banks greater investment into specialist credit teams across areas such as agriculture, health, education, franchising, as well as business banking centers, sets the bank apart. This ultimately gives the bank a better understanding of the customers’ requirements, faster turnaround times, and higher approval rates. Capacity to make investments into digital onboarding and fast access to unsecured lending ensure the bank retains high satisfaction among small business customers.

In home lending, lifting lending volumes to customers directly (not via brokers) is a focus for the bank, being tackled by investing in technology to improve efficiency and customer experience, and by also adding more bankers.

The main current influences on earnings growth are modest credit growth, steady margins as the banks adjust lending and deposit prices for changes in the cash rate, and investments in digital offerings. Tax changes which restrict negative gearing and capital gain tax discounts are also expected to be a headwind for mortgage growth. Operating expenses will continue to rise as the bank invests to capture growth opportunities, this despite productivity improvements being realized.

We expect a return to a midcycle loan impairment expense/loan ratio of around 0.17% in fiscal 2029. Earnings could weaken in the near term if the economic outlook deteriorates and the bank materially lifts provisions.

Bulls Say

  • Management focus is on the successful, lower-risk, and profitable domestic banking. Economies of scale, pricing power, a strong balance sheet, and high credit ratings provide a robust platform to drive growth.
  • As Australia’s biggest business bank, National Australia Bank has the most to gain from strong demand for business credit.
  • NAB has the ability to achieve cost savings and drive operational efficiency improvements.

Bears Say

  • A slowdown in core earnings growth could come from slower business loan growth, margin compression, falling fee income, and a worse-than-expected loan loss outcome.
  • If stress returns to global credit markets wholesale funding costs could increase materially.
  • Regulatory, compliance, remediation, and customer refund risk are difficult to predict.

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