NAB’s 1H26 Credit Impairments Rise to $706 Million with Software Policy Shift

Rising Provisions Reflect Heightened Risk Sensitivity

National Australia Bank (ASX:NAB) is bracing for a $706 million credit impairment charge in the first half of 2026, driven largely by a $300 million increase in forward-looking collective provisions. This adjustment reflects updated economic forecasts and increased weighting to downside scenarios amid ongoing uncertainty from the Middle East conflict. Notably, NAB has applied new sector overlays targeting Agriculture, Transport & Storage, Manufacturing, Construction, and Commercial Real Estate, sectors deemed vulnerable to fuel supply disruptions and cost pressures.

The bank’s collective provisions ratio edged up to 1.35% of credit risk-weighted assets at March 2026, a modest rise from 1.31% at December 2025. Individual assessed provisions remain elevated at $541 million, partially offset by a $135 million write-back in underlying collective provisions.

Capital Management Strategy Includes DRP Discount and Partial Underwrite

Market volatility, including interest rate swings and a weaker New Zealand Dollar, alongside the increased provisioning, has dented NAB’s Common Equity Tier 1 (CET1) ratio by about 20 basis points. To shore up capital, NAB plans to apply a 1.5% discount to its 1H26 dividend reinvestment plan (DRP) and partially underwrite it, aiming to raise up to $1.8 billion and add roughly 40 basis points to CET1 in the second half of 2026. This move should lift NAB’s pro forma CET1 ratio above 12.0%, reinforcing its balance sheet resilience.

These capital actions come after a strong start to the year, with NAB’s recent 15% earnings rise in Q1 underpinning confidence but also highlighting the need for prudent risk management amid shifting geopolitical dynamics.

Software Policy Overhaul Triggers Large Amortisation Charge

In a significant accounting policy shift, NAB has tightened its software capitalisation criteria to better reflect rapid technological change. The threshold for capitalising software has increased from $5 million to $20 million, aligning with peer practices, and the useful life of capitalised software assets has been shortened. These changes have resulted in a $1.347 billion pre-tax accelerated amortisation charge in 1H26, which NAB classifies as a Large Notable Item.

While this write-off will not impact CET1 capital; since capitalised software is already deducted from regulatory capital; it will affect reported earnings. The policy revision is expected to increase operating expenses in the second half of 2026 due to a higher proportion of investment spend being expensed, although amortisation charges should broadly offset each other over time.

NZD Depreciation and Earnings Impact

The depreciation of the New Zealand Dollar has also weighed on NAB’s 1H26 net operating income, reducing it by $81 million after hedging gains. This currency headwind was partially offset by lower operating expenses, reflecting the complex interplay of foreign exchange movements on the bank’s trans-Tasman operations.

NAB’s 1H26 results and final dividend settings remain subject to audit and Board approval, with announcements scheduled for 4 May 2026.