NAB reports profit decline, investors applaud margin stability

On Friday, National Australia Bank, the nation's number three lender by total loans, posted that profit dropped for the June quarter, partly due to amplified costs caused by inflation, which in turn fueled competition; however, a measure of its core operating margins held steady, according to it, and sent its shares higher.

The company stands out as Australia's number one business lender and top-tier mortgage provider, and warned that its business banking portfolio is deteriorating, with "non-performing" loans hitting their highest level in at least two years.

In a limited trading update for the third quarter, it said its net interest margin (NIM), a closely watched measure of bank performance, had remained stable compared to the first two quarters.

Its underlying profit fell 8 per cent to A$1.75 billion from the same three months a year earlier but met analysts' expectations, based on halving the average forecast of second-half profit compiled by market data aggregator Visible Alpha.

Analysts seized on the NIM figure as a sign that the bank may make its way through a price war since 2022, in which interest rate hikes and inflation have prompted lenders to sacrifice margins to lure more customers.

NAB shares climbed 1.5 per cent in mid-session trade, in line with the broader Australian market, as investors looked beyond some softening in the bank's loan quality to focus on its core profit measure.

"Little signs of deterioration in NIM versus market expectations is what is likely to keep the market encouraged so far," said JPMorgan brokers in a client note.

Australia's banks said initially after interest rates began rising that most borrowers were able to make repayments, but have recently reported rising financial stress. NAB said on Friday its asset quality deteriorated further in the June quarter.

The bank said that its ratio of "non-performing exposures to gross loans" was 1.31 per cent at June-end, up 11 basis points since March and the highest since at least September 2021. The bank didn't publish a comparable metric earlier.

The increase reflected "continued broad-based deterioration in the Business & Private Banking business lending portfolio, combined with higher arrears for the Australian mortgage portfolio", it added.

NAB, which commands 23 per cent of the nation's A$1 trillion business lending market, is the most exposed of the nation's so-called Big Four banks to a surge in companies entering external administration, which reached a record in the year to June, according to Australian Securities and Investments Commissiondata.