NAB Strengthens Balance Sheet as Higher Provisions and Software Policy Changes Weigh on 1H26 Earnings

About National Australia Bank Limited

National Australia Bank Limited (ASX: NAB) is one of Australia’s major banking groups, with lending, deposit, business banking, institutional banking and wealth-related operations across Australia and New Zealand. In this latest update, the bank has outlined a series of balance sheet, provisioning and accounting adjustments ahead of its 1H26 result, reflecting a more cautious stance amid heightened economic and market uncertainty.

Higher provisions reflect a more cautious risk stance

NAB’s latest earnings update is defined by a more conservative approach to provisioning. In light of market volatility following the conflict in the Middle East, the bank reviewed its credit provisioning and capital settings to better reflect the risks now seen as inherent in the business. The outcome is an expected 1H26 credit impairment charge of $706 million, including a $300 million movement in forward-looking collective provisions.

That additional provisioning is made up of several components. NAB said it had increased the Economic Adjustment by $152 million, reflecting updates to its base economic forecast and a 2.5 percentage point increase in the weighting applied to the Australian downside scenario, taking that weighting to 45 per cent. It also lifted Forward Looking Adjustments by $201 million to reflect potential stress that may emerge in sectors seen as more exposed to fuel supply and cost issues associated with the Middle East conflict. Those sectors include agriculture, transport and storage, manufacturing, construction and commercial real estate. At the same time, there was a $53 million release in forward-looking adjustments where the anticipated risk had either not eventuated or was now captured in underlying provisioning.

The broader message is that NAB is not waiting for credit stress to fully emerge before adjusting its risk settings. Instead, it is responding early by increasing overlays and adopting a more prudent scenario mix. That is particularly relevant in a period where fuel costs, supply chain disruption and macro uncertainty could pressure parts of the economy unevenly. The ratio of collective provisions to credit risk-weighted assets is now expected to rise to 1.35 per cent at March 2026, up from 1.31 per cent in December 2025.

Underlying credit charges remain significant

Beneath the forward-looking overlays, NAB is also expecting sizeable underlying provision charges. The bank said underlying provision charges are expected to be $406 million, reflecting individually assessed provision charges of $541 million, partly offset by a $135 million write-back in underlying collective provisions from portfolio movements. That compares with total underlying charges of $574 million in the second half of FY25.

This matters because it shows the increase in total impairment charges is not solely about more conservative overlays. There is still meaningful credit cost pressure within the underlying portfolio, even if the collective provision base has seen some offsetting movement. The increase in total impairment charges from $485 million in 2H25 to $706 million in 1H26 reflects both these underlying charges and the larger forward-looking provision build.

From an investor perspective, this points to a tougher near-term earnings backdrop, but also to a balance sheet that may be better insulated if downside scenarios deepen. Banks are often judged not just on the size of their credit charges, but on whether provisioning appears timely and credible. In NAB’s case, management is clearly leaning toward resilience and conservatism.

Capital settings are being tightened as volatility feeds through

Alongside the provision increase, NAB has also moved to bolster capital resilience. The bank said interest rate volatility and a weakening New Zealand dollar during the second quarter, together with the $300 million net increase in forward-looking collective provisions, reduced the group’s Common Equity Tier 1 ratio at 31 March 2026 by about 20 basis points.

There was also an effect from risk-weighted asset settings. NAB said credit risk-weighted assets at 31 March were impacted by a $4.2 billion overlay applied to its internally rated credit models to reflect updates to certain Probability of Default models. As a result of this overlay, along with other RWA movements, there was no adjustment for the standardised floor at 31 March 2026.

In response, NAB expects to apply a 1.5 per cent discount to its 1H26 dividend reinvestment plan and partially underwrite the DRP, subject to board approval. Together, these actions are expected to raise up to $1.8 billion and contribute up to around 40 basis points to the CET1 ratio in the second half of FY26. NAB currently expects to report a pro forma CET1 ratio at 31 March 2026 of greater than 12.0 per cent, including the benefit of the discounted and partially underwritten DRP.

That is a significant capital management step. It suggests the bank wants to maintain capital flexibility while uncertainty remains elevated, rather than relying on a more static capital position and hoping conditions improve. For shareholders, it may dilute the immediate capital return profile through the DRP, but it also reinforces the bank’s preference for resilience.

Software policy changes create a large notable earnings hit

A second major feature of the update is unrelated to credit, but still highly relevant to earnings. NAB has changed its software capitalisation policy from the period ended 31 March 2026. The changes include reducing the useful life of capitalised software assets, changing the nature of assets that can be capitalised, and lifting the threshold for software capitalisation from $5 million to $20 million.

The immediate impact is large. NAB expects to recognise an accelerated amortisation charge of $1.347 billion pre-tax, or $949 million after tax, in its 1H26 result. This will be reported as a large notable item. The bank said the revised policy better aligns accounting treatment with a rapidly evolving technology environment while also introducing greater management discipline.

This is an important distinction: the charge is large, but it is accounting-driven rather than capital-destructive. NAB noted there is no effect on CET1 capital because capitalised software balances are already deducted from group CET1 capital. In other words, the earnings hit is substantial, but it does not weaken regulatory capital in the way a credit loss or capital outflow would.

Expense mix changes, but guidance remains intact

The policy change will also affect second-half operating expenses. NAB expects a higher proportion of investment spend to be expensed in 2H26 because of the higher capitalisation threshold, with about 50 per cent of second-half investment spend expected to be expensed, compared with an average of 38 per cent in FY24 and FY25. The bank currently expects annual investment spend of about $1.8 billion, and noted that investment spend is typically skewed to the second half.

At the same time, lower software balances after the write-off will reduce amortisation charges, although the shorter useful life of the remaining assets will increase amortisation in 2H26. NAB expects these effects to broadly offset each other. Importantly, the bank reaffirmed its previously announced FY26 cash operating expense growth guidance of less than 4.6 per cent. That guidance excludes large notable items, but includes the impact of the software capitalisation policy change on second-half operating expenses.

That reaffirmation matters because it suggests the bank still believes it can contain underlying cost growth even as accounting treatment becomes more conservative. It also helps separate the one-off accounting hit from the ongoing operating cost discipline management is trying to maintain.

New Zealand dollar weakness also affected first-half income

NAB also disclosed a smaller but still relevant earnings drag from currency translation. The depreciation in the New Zealand dollar average exchange rate resulted in an $81 million decline in 1H26 net operating income, net of gains realised on associated hedges. This was partly offset by a benefit to operating expenses.

While this was not the main driver of the update, it reinforces the extent to which several pressures have hit simultaneously: higher forward-looking provisioning, capital and RWA effects, accounting changes to software and adverse foreign exchange translation. Together, they create a more difficult first-half earnings picture, even as some measures are explicitly designed to strengthen the bank for what may come next.

Outlook

NAB’s 1H26 result is shaping up as one defined by caution and resilience rather than near-term earnings momentum. Higher impairment charges, more conservative forward-looking overlays and a major software amortisation hit will weigh heavily on reported profit, but the bank is also moving early to strengthen capital and better align accounting settings with a faster-changing technology environment. The key question now is whether these actions prove sufficient rather than excessive if economic conditions deteriorate further. For now, NAB appears focused on entering the second half with a stronger balance sheet, a CET1 ratio expected to remain above 12 per cent on a pro forma basis, and a more conservative risk posture as uncertainty remains elevated ahead of its full 1H26 result on 4 May 2026.