On 15th August 2016 National Australia Bank (NAB) provided markets with an unaudited third quarter 2016 financial year (3Q16) update. Earnings – Cash earnings were ~$1.6 billion, ~3% lower than the quarterly average of 1H16, and ~3% lower than the prior corresponding period. Unaudited statutory net profit after tax was also ~$1.6 billion, although compositionally different to cash earnings. Group Net Interest Margin (NIM) was slightly lower due to higher funding costs. Expenses remained disciplined with costs falling 1%. Provisions – Bad and doubtful debt charges for 3Q16 rose 21% to $228 million over the quarter, caused by an increase in the mining and agriculture collective provision overlays rising (a common theme reflected by the other major banks last quarter, but not fully reflected by the NAB at that time). 90+ day arrears were up over the quarter by 3 basis points to 0.81%. Capital – As at 30th June 2016 the Group’s Common Equity Tier 1 (CET1) ratio was 9.5%, down 0.2% over the quarter due to the interim 2016 dividend. While this is within NAB’s target range of 8.75% – 9.25% and above APRA’s regulatory minimum requirement of 8%, we expect this ratio to fall by a net amount of ~0.38% to 9.1% (based upon NAB’s 1H16 estimation of a 0.80% fall in CET1 due to APRA increasing the average mortgage risk weight from 16% to 25% from 1st July 2016, a 0.08% decrease due to a Wealth debt maturity offset by an increase in CET1 of ~0.50% due to the sale of 80% of the life insurance business). Liquidity – NAB reported the leverage ratio to be 4.9% on an APRA basis and the average Liquidity Coverage Ratio (LCR) to be 125%. Overall this update is broadly neutral from a credit point of view, but does highlight the challenging environment facing the banking sector over the next 12 months.