NAB cash profit drops after loan loss provisions rise amid worsening arrears in home loan market

A rise in provisions to cover loan losses, as mortgage arrears ticked up, have clipped National Australia Bank’s first quarter cash profits which fell 17 per cent to $1.8bn.

A rise in provisions to cover loan losses, as mortgage arrears ticked up, have clipped National Australia Bank’s first quarter cash profits which fell 17 per cent to $1.8bn.

Although NAB beat analyst expectations, the banking major was the latest lender to report a worsening of its loan book as customers faced a higher rate reality.

The Melbourne-based lender, led by Ross McEwan, said its earnings in the first quarter were 3 per cent lower in the second half of the 2023 financial year.

Mr McEwan, who is set to leave NAB in April, said the cash earnings were “broadly stable” amid the turbulence. Unaudited statutory profits came in at $1.7bn.

NAB saw its earnings crimped by $193m in credit impairment charges as the bank faced higher arrears along with volume growth across its business lending arms.

But it told investors specific charges remained at “low levels”, noting there were no changes to assumptions from the bank for forward-looking adjustments in the quarter

Compared to September 2023, NAB noted its collective provisions to credit risk-weighted assets were only up 2 basis points to 1.49 per cent.

Loans 90 days past due and gross impaired assets were stable at 0.75 per cent, with NAB noting this reflected a worsening of arrears in its Australian home portfolio, while its New Zealand business lending arm improved.

NAB is the latest bank to reveal a worsening arrears position, with Westpac also marking up a worsening of mortgage arrears.

This comes amid a mixed story for the banks, with plenty of borrowers well ahead on loans after several benign years of low loan losses during the Covid-19 pandemic.

Mr McEwan, who marked his last set of NAB results as the bank’s boss on Wednesday, said the quarterly result reflected a “disciplined approach to growth during what remained a highly competitive period”.

NAB’s new CEO Andrew Irvine with outgoing boss Ross McEwan. Picture: Eamon Gallagher

“While economic growth has slowed, the Australian economy remains resilient and the majority of our customers are faring well,” he said. “We continue to be optimistic about the outlook and our bank is in good shape as Andrew Irvine transitions to CEO over coming months.”

The net interest margin was “slightly higher” than NAB’s second half result of 1.71 per cent, while revenue increased by 1 per cent in the period.

NAB’s move to hold its margins came amid a gloomy outlook for the banking sector, with many majors reporting a worsening of earnings on lending amid hot competition.

Expenses lifted 2 per cent in the quarter, with NAB noting the bank was targeting productivity savings of about $400m and expenses growth lower than the 5.6 per cent recorded in 2023.

Mr McEwan said NAB was seeing growth across its customer deposits, which lifted 1 per cent in the quarter, while Australian business lending growth enjoyed a 2 per cent bump.

NAB also reported a 2 per cent growth in customer deposits across its business and private banking arm, amid heightened efforts to get business customers to lock up cash in deposit accounts.

Mr McEwan said NAB was still well above its total capital target for the group, noting the bank was also well ahead on its wholesale funding requirements, with $20bn in funding issued by February 9. “Improving customer and colleague outcomes remains our key focus to deliver sustainable growth and improved shareholder returns.”

Citi analyst Brendan Sproules said NAB’s cash result was in line with forecasts and ahead of consensus expectations.

But he noted “NAB has a history of first quarter cost surprises which tend to be countered through the year”.

“At this stage in the year, we don’t read too much into the strong cost print, noting that NAB has had a history of surprises which have subsided in the past,” he said.

Morningstar senior equity analyst Nathan Zaia said NAB was unlikely to hold its net interest margin position over the coming year, tipping a fall on its lending margins to 1.68 per cent.

“The bank chased loans less aggressively than some peers, helping margins, but it is now increasing close to the market,” he said. “We expect both arrears and bad debt expenses to rise as households and businesses face the full extent of higher rates and inflationary pressures.”

Originally published as NAB cash profit drops after loan loss provisions rise amid worsening arrears in home loan market