Missed on revenue and home loans fell 15%. Airlie's Jack McNally explains why NAB still makes sense

CEO Andrew Irvine says its customers are facing challenges thanks to the “combined impacts of the Middle East conflict, higher domestic interest rates and recent tax changes in the Federal Budget”.

NAB also missed on its headline revenue expectations and net interest margin was down, while credit impairment charges were higher than expected. The market reacted quickly, with the share price down 5.15% at the time of writing.

Despite this, Airlie Funds Management’s Jack McNally says NAB is one of his preferred exposures among major Australian banks, thanks to its lower housing exposure, business banking momentum, lack of a complex IT overhaul, and an attractive valuation at around 16 times earnings.

Key Results - 3Q26

• Cash earnings of $1.83bn vs $1.87bn ests (2% miss), up 2% on the 1H26 quarterly average ex the large notable item
• NIM of 1.79% vs 1.83% ests (4bps miss), or up 2bps ex markets and Treasury
• Credit impairment charges of $299m vs $250m ests, heavier than expected on higher collective provision charges
• CET1 ratio of 11.93% vs 11.93% ests (in line), up from 11.65% at March
• Home loan applications down 15% vs. the second quarter, with Australian home lending in line with system ex the Advantedge run-off
• Australian business lending up 2%, including 4% growth from Business & Private Banking

Do you currently hold NAB and what is your rating?

What matters from the results?

The first one is revenue quality. The headline result was a miss on revenue, but that was pretty much entirely driven by the more volatile markets and Treasury income, and it's probably the lowest quality line in the result. Stripping that out, revenue was up 3% versus the quarterly average of the prior half, and the pre-provision profit was broadly in line with market expectations. 

Second was the core margin. While the reported net interest margin was down 2 basis points to 1.79%, the underlying net interest margin was up 2 basis points on better replicating portfolio earnings and partly offset by the lending competition. So, that's a decent outcome given the current environment and when compared to the results that we've seen from the peers last week.

Then finally volume. Lending volumes grew 1.6% in the quarter, with business up 2% and comfortably ahead of growth for the system. Proprietary lending increased a further 3 percentage points to roughly 51% of flow.

How do those outcomes affect the outlook?

Management reaffirmed its cost guidance for the full year of less than 4.6% and is targeting more than $450 million in operating savings. And as I said, importantly, they don't have a large technology replacement absorbing management attention and adding the potential for cost blow-outs. 

Capital sits at around 11.75% after you adjust for the dividend and the DRP, which was an area that people had a bit of concern around, so there is buffer there to its minimum target of 11.25%.

What should investors be paying attention to as the story unfolds?

The business banking momentum is real. If they can continue to grow that at a far superior rate to system and achieve the strong growth rates that they have, it converts into decent pre-provisioned profit growth against a valuation that's not too demanding versus peers of 16 times. 

On the risks, I think the first is the business credit cycle given NAB is the most business-weighted of the majors. Realised asset quality is still benign and there's some forward-looking indicators that softened this quarter, with watchlist loans rising 6 basis points, some increase in the collective provision reflecting the growth in business banking and some risk migration in the performing book. However, if that were to worsen due to perhaps a deterioration in the economy or conflict in the Middle East, that would be one of the emergent risks. 

Then finally is the housing backdrop. NAB's own forecasts were that housing credit growth will be 2.5%, which is substantially less than what CBA and Westpac have been forecasting. Now they will be the least impacted out of the the majors, however at the same time weakening volume growth would be a negative to the bank, although it would impact Westpac and Commonwealth Bank more substantially.

What could you be wrong about?

But if some of those forward-looking indicators were to more substantially worsen, or if there was a bit more of a flare-up in the Middle East, that would be something which could create more credit risk to NAB specifically. 

The second is just the relative call. We like NAB because it's not as exposed to housing, but if credit growth were to accelerate from here, perhaps we've had some rate cuts or a bit of stabilisation in the housing market, being less of a mortgage bank than Westpac or CBA would would be not as attractive at that point in the cycle.