NAB Shares Outperforming on Month, as Business Lending Grows

National Australia Bank shares (ASX:NAB) closed 0.85% higher at A$41.55 heading into the final trading session of the month, leading its major peers as the lender reported its strongest business lending momentum in two years, though rising watch-list loans and falling mortgage applications tempered the otherwise positive trading update.

The NAB share price heads into the July close up 9.75% on the month at A$41.55, represented a clear relative outperformance against the big four banks on the session, with Commonwealth Bank slipping 0.23% (+8.23% on month), Westpac gaining a modest 0.55% (+8.35%), and ANZ falling 0.58% (+6.11%). The move suggests markets are rewarding NAB’s execution on its core business banking strategy, even as broader macro concerns continue to weigh on the sector.

The gain adds to a pattern of intermittent strength for NAB shares when the bank delivers on its business-focused differentiation strategy, though the stock remains sensitive to broader risk-on, risk-off swings that have characterised Australian bank trading in recent months.

Strong Business Lending Momentum

The bank’s quarterly update revealed business lending balances climbed 4 per cent, with June marking the strongest monthly performance since the 2022 financial year. The result aligns with Reserve Bank of Australia data showing Australian business debt growing at close to its fastest nominal pace since 2008, supported by solid demand across trade, manufacturing and services sectors.

For NAB, which has positioned business banking as a core franchise strength, the volume growth is particularly important because business lending typically carries higher margins than prime owner-occupied mortgages, providing support for net interest income even as competition intensifies in the home loan market.

Home lending balances rose a more modest 2 per cent over the quarter, but the detail beneath that headline figure raised questions about forward momentum. The value of home lending applications fell 9 per cent compared to the prior quarter, an early-cycle volume warning that suggests the pipeline for future mortgage growth is weakening.

The decline comes as the Australian housing market faces headwinds from policy changes and affordability pressures, with high living costs and fixed-rate roll-offs creating a more challenging environment for incremental mortgage demand.

Funding and Deposits

Deposit balances increased 1 per cent in line with seasonal trends, but the more significant detail was the 3 per cent rise in at-call deposits excluding offset accounts. That mix shift is positive for NAB’s cost of funds, as at-call deposits are typically lower-beta funding sources that help defend net interest margins despite intense competition on both loan and deposit pricing. Strong deposit franchises have become a key differentiator among the major banks, with analysts viewing stable, granular funding as particularly valuable in stress scenarios.

The deposit growth lagging behind loan growth, however, does flag a potential future pressure point. With business lending up 4 per cent, home lending up 2 per cent, and deposits rising just 1 per cent, the bank’s loan-to-deposit ratio is edging higher, which could eventually push NAB toward more wholesale funding at higher costs if the trend persists.

Asset Quality

The asset quality metrics presented a nuanced picture that encapsulates both the near-term resilience and medium-term risks facing NAB. Non-performing loans as a proportion of gross loans and advances improved to 2.91 per cent from 3.00 per cent at March, a headline positive that shows reported problem loans remain contained. The improvement helps keep markets comfortable with current impairment charges and suggests that provisions taken earlier in the cycle may be providing an adequate buffer.

Yet the 8 per cent quarterly increase in watch-list loans tells a different story about the trajectory of credit quality. Watch-list loans, which capture borrowers showing signs of stress but not yet classified as non-performing, are a classic leading indicator that often precedes NPL deterioration by several quarters. The bank attributed the rise to “current and potential impacts from a challenging environment,” language that acknowledges the building pressure points in the portfolio.

What Lay Ahead?

All eyes now turn to NAB’s Third Quarter Trading Update scheduled for Monday, 17 August. The update will be scrutinised for confirmation that business lending momentum persisted into early fourth quarter, more granular detail on the composition and sector breakdown of the growing watch list, and any shifts in management’s margin outlook or impairment guidance.

There remains plenty of live debate on either side of the Street about how things play out from here.

Bulls point to continued volume growth, stable deposit funding, and currently benign reported NPLs as evidence that NAB is executing well on its business banking strategy. The bank’s internal business surveys show conditions remain positive despite emerging cost and labour pressures, and provisions already taken may provide a cushion if economic conditions slow without tipping into deep recession.

Bears, however, see a bank leaning into business credit expansion at precisely the wrong point in the cycle. The combination of accelerating business lending, rising watch-list loans, and weakening home loan application volumes creates multiple vectors for disappointment. With loan impairment expenses expected to move structurally higher into fiscal 2027 across the sector, any upward revision to credit cost guidance on 17 August could quickly reverse recent share price gains.