National Australia Bank (NAB) reported a 6% decline in cash profits to $1.75 billion for the June quarter, reflecting its customers’ growing challenges amid rising living costs and high interest rates.
This decline in cash profits has impacted NAB’s ability to invest in new ventures and maintain its current operations. NAB’s CEO, Andrew Irvine, who took over in April, acknowledged the challenging economic environment, noting that inflationary pressures are straining mortgage holders.
NAB’s cash earnings of $1.75 billion remained steady compared to the first half of the year but were down 6% from the same period last year. The decline was primarily due to a $118 million increase in credit impairment charges, which added to the $363 million reported in the year’s first half. This uptick in credit impairments is linked to rising mortgage arrears and a broad-based deterioration in the bank’s business lending portfolio due to the challenging economic conditions and the increased financial strain on NAB’s customers.
The bank reported that non-performing loans had increased by 11 basis points, now accounting for 1.31% of its overall portfolio. This rise was driven by higher arrears in the Australian mortgage portfolio and business and private banking challenges, including increased default rates and a decrease in new loans. These challenges directly result from the economic difficulties faced by NAB’s business and private banking customers.
Addressing a parliamentary inquiry, Reserve Bank of Australia Governor Michelle Bullock emphasised the critical need to control inflation, even as households struggle with high interest rates. Bullock warned that prolonged high inflation would have a more detrimental effect on the economy, eroding purchasing power and disproportionately affecting those on low or fixed incomes.
Despite the pressures from lending competition and customers shifting their savings to higher-yield accounts, NAB’s net interest margin, a key profitability measure, remained stable. This stability in the face of challenges is a testament to the bank’s resilience, reassuring stakeholders. However, analysts have noted that NAB has recently lowered home loan prices to attract more customers, which could strain margins further in the coming months.
While the bank’s revenue fell by 1%, it achieved $400 million in productivity savings during the 2024 financial year. This, coupled with the fact that lending balances grew by 1%, with loans to small and medium businesses increasing by 3% and home loans increasing by 1%, provides a reason for optimism and hope for stakeholders.
Analysts Matthew Wilson and Christian Mazza of Jefferies have expressed concern over NAB’s shrinking core profits, particularly in the current economic climate where asset quality is deteriorating. They pointed out that NAB’s focus on business lending could be increasingly vulnerable as economic conditions worsen, informing stakeholders about potential risks.
E&P analyst Azib Khan noted that while NAB’s net interest margins were slightly better than expected, the quality of its business banking assets is declining. He also highlighted that a lower-than-expected credit impairment charge partially offset revenue softness and slightly better cost management.
Despite these efforts, the deterioration in asset quality remains a significant concern, underscoring the challenges that NAB and its customers continue to face in a tightening economic environment.