National Australia Bank eyes business credit in soft home loan market

• NAB business lending up 11.2% in H2 vs a year earlier
• FY2023 cash earnings A$7.7 bln vs A$7.8 bln analyst estimate
• H2 net interest margin of 1.71% below H1 at 1.77%

SYDNEY, November 9 (Reuters) – National Australia Bank (NAB.AX), the country’s largest corporate lender, said profits outside property lending rose in the six months to September, even as inflation squeezed margins and credit quality, sharpening its focus on growth in non-mortgage business.

For years, Australian banks have taken advantage of low interest rates and rising house prices to derive most of their profit growth from the sale of mortgages, but 13 interest rate rises in a year and a half and the expiry of millions of fixed-rate home loans have boosted competition, flattening margins.
NAB, which ranks third in mortgages and first in commercial lending, is thus in a privileged position as the country’s retail lenders look elsewhere to expand. As consumer demand has grown, so has demand for commercial credit, which generally has higher margins.

NAB reported that in the year to September 30, its commercial unit and private bank increased profits by 21.6%, including an 11.2% jump in the second half compared with the same period last year. Profits in the retail banking segment, which includes mortgages, fell by 10.2% in the second half.
“NAB CEO Ross McEwan told reporters that the bank had deliberately grown its mortgage portfolio more slowly than the market.

“There are much better returns for the bank in other parts of our portfolio. We’re not abandoning (mortgages), we’re turning to our commercial banking.”

Total annual profit of A$7.7 billion (US$4.9 billion), an increase of 8.8%, was slightly below the A$7.8 billion average forecast of analysts consulted by data aggregator Visible Alpha. The largest rival mortgage bank, Westpac (WBC.AX), also posted a higher annual profit on Monday, despite a drop in profits from home loans.
NAB shares were up 0.8 percent at mid-session, in line with the broader market (.AXJO), as analysts praised the business unit’s performance, but noted that NAB’s exposure to mortgages and rising arrears could create hurdles.

“In terms of asset quality, we expect the modest deterioration taking place to lead to nervousness about asset quality going forward,” said Azib Khan, analyst at E&P Financial.

The company’s net interest margin, a closely watched banking measure that consists of interest income from loans minus payments on deposit accounts, fell to 1.71% at September 30, from 1.77% at the end of March.

Loan impairment charges of A$802 million increased from A$125 million a year earlier, reflecting deteriorating asset quality.

NAB declared a final dividend of 84 Australian cents per share, compared with 78 Australian cents the previous year.

($1 = 1.5618 Australian dollars)