National Australia Bank’s (ASX: NAB) underlying fiscal 2026 cash profit of AUD 7.1 billion is flat on last year. Revenue increased 6% on strong business lending, but a 5% rise in operating expenses, a near doubling of loan impairment expenses, and weakness in New Zealand absorbed the gain. Shares fell 5%.

Why it matters: Profit missed our forecast by 3%, mainly due to higher bad debts. With credit stress rising, the Reserve Bank of Australia increasing rates further, and unemployment trending up, we lift our short-term bad debt forecasts, which lowers our fiscal 2027 and 2028 profit forecasts by about 5%.

  • The bank’s above-peer small-business exposure is a vulnerability in a downturn: some lending is unsecured, collateral like equipment and inventory can lose value fast, and small firms have less earnings diversity, pricing power, and funding access than larger corporates.
  • Net interest margin slipped 2 basis points in the half to 1.79%. Management expects deposit and capital hedges to add about 3 basis points in the first half of fiscal 2027, but we expect competition to absorb most of it, leaving NIM broadly steady.

The bottom line: We lower our fair value estimate for wide-moat National Australia Bank by 3% to AUD 32, on lower revenue growth and higher short-term loan impairments. Shares overvalued.

  • A forward PE of 16 times and a fully franked dividend yield of 4.4% look demanding given our expectation for around 5% average profit growth per year to fiscal 2031.

Between the lines: Credit stress is rising from low levels, led by business lending. Second-half loan impairment expense of $841 million, or 0.20% of loans annualized, was up 19% on the first half.

Mortgage arrears are rising among business owners. That matters for NAB, which often lends to the same customer for both their business and their home, so if the business struggles, both loans can come under pressure at once. That said, 90-day arrears of 1.09% are still low and only slightly higher than a year ago.

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 2030. 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.
  • Artificial intelligence increases deposit pricing competition by reducing customer inertia and making it easier to shift funds to higher-yielding accounts, raising funding costs and pressuring margins.
  • Regulatory, compliance, remediation, and customer refund risk are difficult to predict.