The Australian banking landscape has been a turbulent sea of late, with rising interest rates, intense competition in home lending, and a general sense of economic uncertainty. Amidst this storm, National Australia Bank (NAB) has emerged as a beacon of stability, posting strong overall results and demonstrating a disciplined approach to navigating these choppy waters.

While much of the market commentary has centered on NAB's impressive Business Bank growth and its impact on overall earnings, a deeper dive into the transcript reveals a fascinating and largely overlooked story: the resilience of business lending margins.

The prevailing narrative suggests that margin pressure is pervasive, impacting all areas of the Australian banking sector. However, NAB's transcript paints a different picture for business lending. While the bank acknowledges a modest decline in business lending margins at the group level – less than one basis point – it explicitly states, "We haven't really seen any compression at all in the half on business lending NIM." - NAB Q4 2023 Earnings Call Transcript

This revelation should pique the interest of any seasoned analyst. In a time when home lending margins are being squeezed to the point of being below the cost of capital, the stability of business lending margins suggests a powerful dynamic at play within NAB's Business Bank.

One possible hypothesis is that NAB's long-standing leadership in the SME sector, coupled with its strategic investment in relationship banking, has created a "stickiness" within its business customer base that transcends mere price competition. As Ross McEwan, NAB's outgoing CEO, aptly put it, "It's a relationship business… It's called relationships, and we expect it to continue." - NAB Q4 2023 Earnings Call Transcript

The numbers back this up. NAB boasts a 21.7% market share in Australian business lending, the largest in the country. Its Business and Private Banking division has grown business lending by a staggering 31% over the past three years, while also achieving a 38% increase in underlying profit.

This suggests that NAB's approach of focusing on long-term value creation through deep customer relationships, expert sector specialization, and consistent investment in its banking teams is yielding dividends, even in a challenging market.

Further bolstering this hypothesis is the fact that NAB has deliberately chosen to moderate home lending growth, prioritizing higher returns in other areas, like its Business Bank. The bank's recent announcement of a $1.5 billion increase in its on-market buyback, coupled with its strong capital position and provisioning levels, further underscores its confidence in the underlying strength of its business-focused strategy.

It's worth noting that NAB's focus on relationship banking extends beyond its SME franchise. The bank has also seen positive trends in its Corporate and Institutional Banking division, achieving a remarkable 15.6% ROE. This suggests that NAB's relationship-led approach is a potent force across its entire business banking spectrum.

Growth in Business Lending vs. Home Lending (Past 3 Years)

The following chart illustrates NAB's strategic focus on growing its Business Bank while moderating home lending growth.

So, while the headlines might focus on the broader margin pressures facing the Australian banking sector, the astute investor will recognize the hidden gem within NAB's Business Bank – a compelling story of margin resilience and long-term value creation through the power of relationships. It's a story that no one else seems to be talking about, but one that could have significant implications for NAB's future profitability and its ability to continue rewarding its shareholders.

"Fun Fact: Did you know that NAB was one of the first banks in Australia to offer online banking services? They launched their online platform, NAB NetBank, back in 1995, revolutionizing the way Australians banked."