National Australia Bank’s (ASX: NAB) first-quarter profit of $2 billion jumped 16% on the average of the prior two quarters. Loan growth and a modest improvement in net interest margins drove the top line, while operating expenses were held flat, and loan impairment expenses fell. Shares rose 4%.

Why it matters: This is a strong quarter, with NIM improving more than expected and loan impairment expenses showing no sign of returning to historical averages. Incorporating these trends, which we think can hold, lifts our fiscal 2026 NPAT forecast by 5%.

  • With fierce competition, management must keep expenses down while investing for the future. Despite flat expenses in the quarter, investment spending can be lumpy, and management reiterated expense growth guidance to be lower than last year’s 4.5%. We maintain our 3.7% forecast.
  • Deposit pricing has eased recently, supporting our view that banks will move prices on both sides of the balance sheet to generate a NIM that flows through to a reasonable ROE. National Australia Bank returning to loan growth in line with the market, likely offsets margin upside from higher cash rates.

The bottom line: With stronger near-term and modestly higher medium-term forecasts, the latter on lower loan impairments, we increase our fair value estimate for wide-moat National Australia Bank 3% to AUD 34.

  • An average ROE of 12% over the past three years speaks to the bank’s quality. But at a forward P/E of 18.5 times and with a dividend yield under 4%, we think shares are materially overvalued, given a low growth outlook due to challenging housing affordability.

Between the lines: The bank is well capitalized, with a common equity Tier 1 ratio of 11.5%. This supports our dividend forecasts and gives a buffer for a larger-than-expected rise in credit stress.

  • Loan impairments/gross loans of 0.08% are nearly half of the five-year pre-covid average. Our medium-term impairment forecast of 0.17% sits between this level and the 20-year average.

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, improving 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 midcycle levels around 0.17% in fiscal 2029. High levels of bad debt provisions expected to help buffer the earnings impact of rising impairments in the short term, and could even be a positive for earnings if released.

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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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.