National Australia Bank (ASX: NAB) has lifted loan impairment provisions by $300 million to cover potential stress from sectors directly affected by the Middle East conflict, and broader downside to the Australian economy. The bank also plans to partially underwrite the dividend to raise $1.8 billion.

Why it matters: Our fiscal 2026 profit forecast is lowered 3% on higher loan impairments. The change to loan impairments, the equity raising, or change to software capitalization do not materially affect our long-term forecasts.

  • Our fiscal 2026 forecast loan impairment expense forecast increases $350 million to $1.2 billion, with a loan ratio of 0.16%, up from 0.11% last year. Provisions for the covid-induced downturn proved conservative, but at this stage, we assume no reversal of provisions.
  • The capital raising is relatively small, with shares on issue increasing by less than 1.5%. We forecast a modest increase in fiscal 2026 dividends to $1.72, assuming the bank balances the uncertain outlook with the importance shareholders place on fully franked dividends.

The bottom line: Our fair value estimate for wide-moat National Australia Bank of $34 is maintained. The lower fiscal 2026 forecast is immaterial, and our fair value estimate had already incorporated loan impairments/loans reverting closer to long-term averages of 0.17%.

  • Shares have eased from record highs, but at a forward P/E of 17 times and a dividend yield around 4%, they remain materially overvalued. The outlook for credit growth is challenged by higher interest rates, changes to tax setting for investors, and weak consumer confidence.
  • Disruptions to supply chains and input costs due to the Middle East conflict could also lead to more bankruptcies and may even lead to higher unemployment, which would flow through to higher loan impairments across all segments.

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 amongst 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. 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.