NAB's Bad Debt Warning Leaves It the Outlier Among Major Banks

A profit warning and patchy credit quality have some fund managers avoiding the major banks altogether, while others see NAB's SME franchise as the pick of a weak field.

4 Sep 2026 · 3 min read

National Australia Bank delivered the largest profit warning among the major banks heading into its May result, flagging higher bad debts, a software impairment and a partially underwritten dividend reinvestment plan, and while an August business banking update beat feared expectations, credit quality remains the market's persistent worry relative to its big-four peers.

A profit warning exposes a relative weak spot

Pendal Group said NAB's profit warning ahead of its May result was the largest among the majors, flagging higher bad debts, a software impairment and a partially underwritten dividend reinvestment program, and the result itself confirmed bad debts and capital remain a relative weak point, with underlying bad debts running at 18 basis points of gross loans, double the level of peer banks. Perennial Partners described weak revenue growth offset by good cost control and generally sound credit quality, with dividends held flat for the half, though the broader earnings outlook for banks remains subdued given federal budget changes to negative gearing and capital gains tax.

Underlying bad debts were a particular focus at 18bps of gross loans (double peers).

— Pendal Group, Newsletter, May 2026

Fund managers turn cautious on the sector, and on NAB specifically

Investors Mutual Limited held at hold, saying it remains cautious on the major banks broadly but views NAB as its preferred stock after it underperformed peers significantly over the quarter, liking its SME-focused, relationship-based franchise and its comparatively lower exposure to budget-driven housing and mortgage growth pressures. Plato Investment Management rated the stock a sell, arguing the majors have ridden the coattails of very low bad debts for three years, a dynamic it believes is now changing as the Australian economy softens and property prices come under pressure. Quest Asset Partners exited its position entirely, describing a challenged sector with slowing credit growth, bad debts rising off historic lows, heightened competition and still-elevated valuations, requiring tight cost control to grow earnings against high inflation and rising technology costs.

They've been riding the coattails of having very low bad debts, but we think that's changing the Australian economy.

— Plato Investment Management, Article, June 2026

August brings a mixed picture: good business lending, patchy credit quality

Pendal Group said an August business bank briefing delivered a positive trading update, with business loans up 14 percent annualised in the June quarter and non-performing loans moderating from 3.0 percent to 2.9 percent, both better than the market feared, though management remains cautious on the outlook, expecting loan growth to moderate to around 7 percent in FY27. A separate third-quarter trading update missed slightly more than peers, with pre-provision profit 2 percent below consensus against smaller misses at Westpac and ANZ and an in-line CBA, largely a function of volatile markets income rather than margins, which were in line. Pendal noted sentiment centred on NAB's credit quality, which remains patchy, since unlike ANZ and CBA it had no beat on bad debts.

What fund managers say they are watching next is whether NAB's credit quality gap to ANZ and CBA narrows or persists, whether business loan growth moderates to the guided 7 percent in FY27, resolution of the software impairment and dividend reinvestment underwriting situation, and whether its SME-focused franchise keeps outperforming as housing-linked headwinds weigh more heavily on mortgage-focused peers.