The National Australia Bank Ltd (ASX: NAB) share price is under the spotlight after the ASX bank share announced its 2023 third quarter update.
June quarter update
- Cash earnings grew by 5.8% to $1.9 billion
- Cash earnings excluding tax and credit impairment charges rose 16%
- Statutory net profit of $1.75 billion
- Net interest margin (NIM) fell 5 basis points (0.05%) to 1.72%
- Common equity tier 1 (CET1) ratio of 11.9%
The bank pointed out that compared to the FY23 first half quarterly average, cash earnings before tax and credit impairment charges declined 5%.
Lending growth was “broadly flat” with growth in housing and Australian small and medium business lending offset by lower corporate institutional volumes.
The bank’s total revenue dropped 2% because of the lower lending margin.
NIM is the measure of lending profitability, comparing the bank’s overall loan rate, to the cost of funding those loans (such as term deposits and hybrids). The NIM dropped because of home lending competition combined with higher deposit costs.
Expenses increased by 3% with higher wages and continued investment in technology, though this was partly offset by productivity gains.
Arrears
NAB reported that this quarter included a credit impairment charge of $244 million, reflecting a “modest deterioration” in its loan book and volume growth. The bank’s bad debts “while higher, remain at low levels”. Continued worsening of this could be felt negatively in the NAB share price in future quarters.
The ratio of loans that are at least 90 days overdue increased again to 0.71% for this quarter, increasing from 0.66% at March 2023 and 0.62% at December 2022.
NAB share buyback
The ASX bank share announced its plans to buy back up to $1.5 billion of its shares on the market to progress its CET1 ratio towards the target range of 11% to 11.5%. The buyback is expected to start in late August 2023.
This buyback is calculated to reduce the CET1 capital ratio to around 11.5% at level 1.
NAB CEO Ross McEwan said:
This decision is consistent with our focus on maintaining a strong balance sheet through the cycle while progressively reducing our share count over time.
Final thoughts on the NAB share price
Before today’s update, NAB shares had been rising from the June low. It’s still lower than the February 2023 high, and profitability seems to have reduced from then.
I think NAB is one of the stronger banks in Australia, demonstrated by its year-on-year earnings growth, but I’m not expecting much earnings growth in the next 12 months due to rising arrears and low credit growth.
