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Highlights
- Shares dropped over 7% to AU$36.45 following the release of its first-quarter update.
- Revenue increased 3%, but cash earnings fell 2% due to higher expenses and impairment charges.
- Net interest margin (NIM) declined amid funding cost pressures and competitive lending conditions.
- Credit impairment charges rose to AU$267M, with business lending and retail portfolios driving the increase.
- CET1 capital ratio at 11.6%, maintaining financial stability.
National Australia Bank Ltd (ASX:NAB) shares tumbled over 7% to AU$36.45 following the release of its first-quarter update, as investors reacted to rising costs, margin pressures, and an increase in credit impairment charges.
Revenue Growth Offset by Higher Expenses
While NAB reported a 3% increase in revenue, largely supported by stronger Markets & Treasury (M&T) income, its core banking revenue remained flat. Competitive pressures and higher funding costs squeezed its net interest margin (NIM), which declined during the quarter.
This margin compression has been a recurring challenge for Australian banks, as they struggle to balance competitive lending conditions with rising deposit and funding costs.
Cash Earnings Decline by 2%
NAB’s cash earnings fell 2%, missing analyst expectations. The decline was driven by a 2% rise in expenses, which management attributed to higher personnel costs, increased spending on financial crime compliance, and ongoing technology investments.
While productivity improvements and lower AUSTRAC-related compliance costs helped contain some of the expense growth, they were not enough to offset the broader increase in operating costs.
Credit Impairment Charges Surge to AU$267M
One of the biggest concerns from the update was a significant rise in credit impairment charges, which jumped to AU$267 million. This included:
- AU$152 million in individually assessed charges, mainly linked to business lending and unsecured retail portfolios.
- AU$115 million in collective charges, reflecting deteriorating asset quality and rising business loan provisions.
Additionally, NAB’s non-performing loan ratio increased by 4 basis points (bps) to 1.43%, and mortgage arrears edged higher, raising concerns about potential defaults in a challenging economic environment.
Market Reaction & Outlook
Investors responded negatively, driving NAB shares down over 7% as worries over margin compression, rising expenses, and worsening credit conditions weighed on sentiment.
Despite the sell-off, NAB remains financially stable, with a Common Equity Tier 1 (CET1) capital ratio of 11.6%, ensuring adequate capital buffers to weather economic headwinds.
