National Australia Bank (ASX:NAB), one of Australia's big four banks, has reported a stronger June quarter profit, but the lender has taken a notably more cautious view of the housing market as higher interest rates, recent property tax changes and geopolitical uncertainty weigh on borrowing demand.

Profit lifted by lower bad debt charges

NAB booked a third quarter cash profit of $1.83 billion in its quarterly trading update, up 4% from the same period a year earlier and 32% above the average quarterly profit recorded during the March half. The improvement was largely driven by lower bad debt charges.

Australian banks report full audited results only half-yearly, so the quarterly update and its cash profit measure, which strips out volatile items, gives investors an interim read on trading ahead of full-year numbers.

Chief executive Andrew Irvine said customers were facing a more uncertain environment, pointing to higher interest rates, changes to housing taxation and the ongoing fallout from the Middle East conflict.

Sharply weaker housing credit outlook

The more significant signal from the update, however, was NAB's housing credit forecast. The bank now expects overall housing credit growth of just 2.5% in FY27, a figure substantially below the forecasts published by its major-bank peers.

Housing loans are the largest asset class on Australian bank balance sheets, so the pace of system-wide credit growth feeds directly into major-bank interest income, making the gap between NAB's outlook and its rivals' a notable point of difference in the result.

Within that outlook, NAB expects investor lending to contract by 1.4%, while owner-occupier lending is forecast to grow by 4.5%.

The guidance reflects conditions already visible across NAB's mortgage pipeline. Home loan applications fell 15% quarter on quarter in the June quarter, with investor applications down 17% and owner-occupier applications down 14%.

Slowdown spans the major banks

The weakness is not isolated to NAB. Westpac has reported a 20% decline in applications, CBA a 15% fall and ANZ a 12% decline, with the banks pointing to higher rates and the federal government's housing tax changes as the key drivers.

Because the big four together write the bulk of the country's home loans, their application pipelines double as a near real-time gauge of national borrowing appetite. July data from credit bureau Equifax added to the concern, showing overall mortgage demand falling 16.4%, while first-home buyer demand dropped 19.2%.

The result is a more competitive lending environment, with the major banks chasing a shrinking pool of new mortgages. NAB's net interest margin, the spread between what the bank earns on lending and pays on funding, fell two basis points to 1.79%, as lending competition offset part of the benefit from higher returns on hedges.

Credit quality under watch

Credit quality is another area investors are watching closely. NAB increased collective provision charges to $119 million during the quarter, compared with $39 million previously, citing deterioration in the quality of its performing loan book.

Collective provisions are the forward-looking buffers banks hold against loans that are still being repaid but judged more likely to sour, so the size of the build signals how the bank is pricing emerging risk rather than losses already incurred.

Impaired loans stood at 0.3% of the loan book, compared with 0.25% a year earlier, although the ratio was slightly better than in the previous quarter.

Tougher backdrop despite a stronger headline

The combination of weaker mortgage demand, tighter margins and emerging credit stress presents a more difficult operating backdrop for NAB, even as the headline profit figure improved on the back of lower bad debt charges.

NAB's full-year results, due in November, will show whether the weaker application pipeline has begun to flow through into lending balances and whether the provision build continues at the same pace.