Credit Update: NAB – High-Quality Defensive Credit with Compelling Yield (4.5%–6.1%)

Highlight

• Resilient Australian Mortgage Market: Support by sound borrower fundamentals, tighter underwriting, and a resilient labour market, which combined help cushion the impact of rising interest rates despite a more challenging environment.

• Banking Sector Resilient Amid Property Tax Reforms: Investor demand may soften and credit growth moderate, but the Australian banking sector remains supported by resilient mortgage fundamentals, strong borrower buffers, and continued owner-occupier demand.

• Stable Profitability Growth: NAB continues to deliver stable earnings, driven by higher net interest income and solid loan growth, which partially offsets ongoing net interest margin compression.  

• Robust Asset Quality: Supported by low NPL ratio (1.53%), and strong borrower equity (LTV ~37%) below 5-year average, providing a meaningful buffer against property market stress.

• Robust Capital and Liquidity Metrics: NSFR ratio of 116% and LCR of 132% remain well above regulatory requirements and peer averages, indicating a strong liquidity and stable long-term funding profile that supports resilience under stress scenarios. 

• Recommendation: Investors may consider AUD and USD senior unsecured and Tier 2 bonds, offering attractive yields in the range of 4.5% to 6.1%.

Overview

National Australia Bank (NAB) is one of Australia’s “Big Four” banks and the country’s third-largest bank by assets after Commonwealth Bank of Australia (CBA) and Westpac Banking Corporation (WBC). As of 31 March 2026, NAB reported total assets of approximately AUD $1.1 trillion, while its market capitalisation stood at around AUD $130 billion as of 25 June 2026.

NAB is structured into five core divisions: Business and Private Banking (B&PB), Personal Banking, Corporate and Institutional Banking (C&IB), New Zealand Banking, and Corporate Functions and Other. Although it has international operations, the Group’s earnings are predominantly driven by the Business and Private Banking segment, which accounted for 52% of 1HFY26 cash earnings. While residential mortgages remain the backbone of the Group's balance sheet representing 55% of total gross loans the bank's strong domestic franchise is most clearly reflected in its position as Australia’s largest business lender.

Australia Mortgage Market

In 2026, the Reserve Bank of Australia (RBA) shifted from the easing cycle seen in 2025 to a tightening stance, implementing three 25-basis-point rate hikes in February, March, and May, raising the cash rate from 3.60% to 4.35% in an effort to contain inflation.

With inflation has moderated from the high of 4.6% YoY in Mar 2026 to 4.0% YoY in May 2026, this further strengthen our belief that the current interest rate is close to terminal level, while not ruling out the possibility of another rate hike from RBA, should trimmed mean inflation persists to be higher than RBA's target of 2%-3%.

Overall, Australia’s housing market is expected to moderate in 2026 given higher interest rates and macro uncertainty. Nonetheless, the combination of a tighter underwriting, sound borrower fundamentals and resilience labour market condition should help cushion and limit the extent of any potential downturn.

For more insights into the Australian mortgage market, please look at Credit Update: Commonwealth Bank of Australia – High-Quality Defensive Credit with Pickup (4.7%–6.2%).

Australia’s 2026–27 Federal Budget Proposal Property Tax Reform

Australia’s proposed 2026–27 property tax reforms are expected to moderate investor demand in the established housing market, particularly among higher-income and leveraged investors who benefit most from negative gearing and CGT concessions. This could slow housing credit growth and create a mild earnings headwind for the Australian banking sector over the medium term.

However, the overall impact on the banking sector is expected to remain manageable. Grandfathering provisions, continued demand from owner-occupiers and first-home buyers, as well as incentives for new residential developments, should help support housing activity and partially offset softer investor lending demand.

In addition, the Big Four banks continue to maintain strong mortgage credit fundamentals, supported by low mortgage NPLs, prudent underwriting standards, healthy borrower equity, and rising household savings buffers. Overall, the reforms are more likely to drive a gradual housing market rebalancing rather than trigger a severe downturn, with the Australian banking sector expected to remain resilient.

For more insights into the Australian mortgage market, please look at Australia's Proposed Property Tax Reform: What Is the Impact on Australia's Banking Sector. 

NAB’s Resilient 1HFY26 Performance Amid Economic Uncertainty

As show in Table 1, NAB delivered a solid 1HFY26 performance (as of March 2026), supported by continue loan expansion. Gross loans and acceptances rose by 6.3% YoY, while average interest earning assets grew by 2.0%, reflecting sustained lending momentum. This is supported net interest income which increase by 8.5% YoY to AUD $9.16 billion.

NAB’s net interest margin (NIM) increased by 11 basis points YoY to 1.81%, driven by higher earnings from deposit and capital replicating portfolios, as well as a lower mix of lower-yielding liquid assets. This reflects improved balance sheet efficiency and stronger interest income stability.

Non-interest income declined by 6.4% YoY to $1.7 billion, mainly due to a 15.8% fall in trading income to AUD 596 million, reflecting adverse movements in economic hedges. Meanwhile, the cost-to-income ratio (excluding notable items) improved from 46.8% to 46.2%, supported by disciplined cost management and operational efficiency.

Interest expenses declined by 16.6% YoY to $17.3 billion, primarily driven by a lower average interest rate, which fell from 4.4% in 1HFY25 to 3.5% in 1HFY26. Meanwhile, total credit impairment charges increased by 102.9% YoY to AUD 706 million, reflecting a net increase in forward-looking collective provisions of approximately AUD $300 million. This increase was mainly attributed to provisioning for potential credit stress related to Middle East conflict.  Overall, NAB’s 1HFY26 results reflect resilient earnings, driven by solid loan growth and improved net interest margins, offset by softer trading income.

Table 1: Key Metrics for NAB

Asset Quality Remained Resilient Amid Macro Uncertainty

Asset quality remained resilient in 1HFY26, with the non-performing loan (NPL) ratio has slightly increased to 1.53% from 1.50% in 1HFY25, significant driver was the downgrade and impairment of a small number of customers within the Corporate & Institutional Banking (C&IB) portfolio it also an increase in stage 3 exposure. Although this is slightly above the five-year average NPL level of 1.24 %, it remains at a manageable level.  

NAB maintains a dominant position in Australian housing finance, accounting for 14.1% of the mortgage market and 55% of its domestic loan book. Despite this concentration, borrower resilience remains strong, with Loan-to-Value Ratios at 37%, below the five-year average of 39.4%, providing a solid collateral buffer against potential property market corrections.

Although total provisions for expected credit losses increased to AUD $6.39 billion (1HFY25: AUD 6.04 billion), this reflects a prudent approach to maintaining strong balance sheet buffers amid global uncertainty. NAB also retains an approximately AUD $1.93 billion in forward looking provision ensuring its adequate provision for expected credit losses (ECL). This conservative posture is reflected in a provision coverage ratio increase from 1.67% in 1HFY25 to 1.68% to 1HFY26 and higher credit risk-weighted assets (RWA), continues to provide a significant cushion against potential future volatility. 

Strong Capital, Liquidity and Funding Profile

NAB’s capital and liquidity positions remained robust in 1HFY26. The Common Equity Tier 1 (CET1) ratio declined slightly 11.7%, well above the minimum regulatory requirement of 10.25% and the bank’s post-dividend operating target of above 11.25%. The strong capital position was primarily supported by earnings generation (+81bps), although this was partially offset by dividend distributions (-59bps) and growth in Risk-Weighted Assets (RWA) (-33bps), reflecting ongoing loan expansion and balance sheet growth.

Liquidity metrics also remained resilient, with the Net Stable Funding Ratio (NSFR) at 116% and the Liquidity Coverage Ratio (LCR) at 132%, both well above regulatory minimum regulatory requirement of 100%. In addition, the bank maintained a substantial LCR surplus of approximately AUD 48 billion, providing a strong liquidity buffer against potential market stress and funding volatility.

Wholesale funding is well laddered, with a stable weighted average maturity (WAM) of around 5.2 years and no concentration in any single period, reducing rollover risk and strengthening resilience under uncertain interest rate environment.

How NAB stand against other Australian banking giants

Relative to its peers, NAB distinguishes itself with a robust funding and liquidity profile, reporting a high NSFR and LCR at or in line with peer levels. This reflects a strong funding and liquidity buffer reinforcing its resilience under potential stress scenarios. Overall, NAB’s balance sheet metrics highlight strength in funding and liquidity management, positioning it favourably among the Big Four banks. 

Table 2: Peer Comparison

Key risk

Interest Rate Risk: Higher rates may support net interest margin through repricing but could increase funding costs and borrower stress, potentially constraining loan growth and elevating credit risk. However, impacts are partly mitigated by strong collateral buffers and prudent underwriting.

Proposal Property Tax Reform Policy Risk: Housing policy reforms may moderate investor demand and slow mortgage growth, while high exposure to residential mortgages leaves NAB sensitive to property price corrections. Nevertheless, grandfathering provisions and resilient housing fundamentals should limit near-term impact.

Macroeconomic Risk: A broader economic slowdown could weaken household income and employment, pressuring borrowing capacity and asset quality. This is partly offset by NAB’s strong capital position and stable funding base.

Recommendation

Overall, NAB’s dominant market position, strong funding and liquidity buffers, and disciplined balance sheet management underpin its credit resilience. Together with well-managed credit risk in its mortgage portfolio, the bank is well-positioned to navigate the current tightening cycle and upcoming property tax reforms.

We recommend the following USD and AUD senior unsecured bank bonds in Table 3, which offer compelling yields ranging from 4.5% to 5.3%.

For investors seeking higher returns and willing to accept moderately higher risk, USD and AUD subordinated Tier 2 bonds from these banks present an attractive opportunity (Table 4), these instruments offer yields ranging from 5.5% to 6.1%.

It is important to note that Tier 2 bonds carry loss absorption risk, as their loss-absorbing features may be triggered in the event of a non-viability scenario. When assessing these instruments, both yield and years to call are key considerations. Under Basel III regulations, Tier 2 bonds not redeemed past their call date must be amortised, which encourages issuers to call and refresh their Tier 2 capital earlier.  

Table 3: NAB’s Senior Unsecured Bond

Table 4: NAB’s Tier 2 Bond