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Highlights

  • NAB impacted by RBA’s 25 basis point rate cut to 3.85%, with more cuts potentially ahead.

  • Increased competition in business banking poses structural challenges.

  • UBS forecasts gradual profit growth for NAB, with NPAT projected to hit $7.85 billion by FY29.

National Australia Bank Ltd (ASX:NAB), one of the country's largest financial institutions, is navigating a dynamic and challenging environment in the first half of 2025, with changes in monetary policy and intensifying competition in business banking shaping its performance outlook.

In a significant move, the Reserve Bank of Australia (RBA) recently cut the official cash rate by 25 basis points to 3.85%. Economists suggest that further reductions—potentially two or three more cuts—could follow within the next 12 months as part of efforts to stimulate economic growth.

The lower interest rate environment presents a mixed outcome for NAB. On one hand, the reduced cost of borrowing may lower the risk of customer defaults and financial distress among borrowers. On the other hand, it limits NAB’s capacity to generate interest income, particularly from transaction account balances, which typically do not pay interest to depositors. With lower benchmark rates, the return NAB can earn on these balances through lending activities also declines, potentially affecting its overall profitability.

Business banking remains a central component of NAB’s earnings profile. In its FY25 half-year result, the bank reported $1.63 billion in cash earnings from its business and private banking division, significantly higher than other segments, including personal banking ($576 million), corporate and institutional banking ($909 million), and its New Zealand operations ($781 million). 

However, UBS has flagged rising competitive pressures in the business banking sector. In a recent analyst note, the brokerage highlighted that rival banks, including Commonwealth Bank of Australia (ASX:CBA), appear more determined to expand their presence in this lucrative segment. UBS cautioned that NAB could face a “structural headwind” due to its exposure to small and medium-sized enterprise (SME) lending, as other players intensify efforts in a market where growth opportunities are increasingly limited.

Despite these challenges, NAB's overall profit outlook remains positive. UBS projects that NAB’s net profit after tax (NPAT) will edge up to $7.08 billion by FY26 and continue to grow, reaching $7.85 billion by FY29.