While market noise continues to play havoc on National Australia Bank’s top line, investors and analysts will look through this to the bank first-half cash earnings which marks an 8.2 per cent increase from last year to $2.19 billion.
NAB’s headline profit fell 21.6 per cent to $2.1 billion in the six months to end-March on a fall in the value of a number of hedging instruments linked to its long-term funding. But remember this time a year ago, these same instruments exaggerated the top line.
The cash profit figure largely met the average of analyst estimates, while the 1 cent a share increase in dividend was slightly softer than expected, suggesting the bank is holding onto capital ahead of a potential acquisition of wealth manager Axa Asia Pacific.
NAB continues the theme of other banks that delivered annual reports over the past two weeks – namely weak revenues, funding costs pressuring margins and bad debts falling away. While return on equity measures have been improving, this is not enough to win over investors.
NAB chief executive Cameron Clyne says he is pleased with the result, given the headwinds the bank faced. Like his rivals, he is cautious on global economic aftershocks but optimistic when it comes to the outlook for credit growth in Australia.
Given its relative small share of the mortgage market, NAB missed much of the upside from the boom in retail and personal banking over the past year. But Clyne insists the economic environment is starting to shift in favour of NAB’s business model - that is business lending and wealth management.
Despite hurdles from the competition regulator, NAB still appears to be more determined to pursue Axa Asia Pacific over any potential expansion of the bank’s UK franchise, which is still eyeing a portfolio of Royal Bank of Scotland branches.
Just like Westpac, NAB experienced a substantial profit kick from the faster-than-expected drop in the charge for bad debts. For NAB this was down $581 million or 32.1 per cent from the same time last year. In Westpac’s case the fall in bad debts was a much steeper pace at 45 per cent.
While this is cause for cheer for the sector, this form of profit growth soon becomes the low hanging fruit which doesn’t last long as the economy recovers.
NAB outshone Westpac on margins, boosting margins 19 basis points from March last year, suggesting it was able better pass on higher funding costs to business customers.
While the other major banks have been able increase revenue during the March half, NAB went backwards – around 3.3 per cent as treasury and trading income pulled back from the high levels last year while cuts to a range of fees and charges started to be felt.
Expense growth of 2.4 per cent trailed inflation, the drop in revenue gave it so called “negative jaws” when it comes to costs outpacing revenue growth.
However, NAB’s performance on home loans improved 3.4 per cent, but business lending, as expected, was flat. All up NAB’s lending book grew by 2.7 per cent after stripping out the impact of the stronger Australian dollar while deposits rose 2.3 per cent.
So far ANZ is still emerging with the stronger retail franchise after it delivered underlying profit growth of 4 per cent, compared to Westpac retail operations where cash earnings fell by 3 per cent while NAB’s personal banking business was down 22 per cent.
New Zealand remains tough with earnings dropping 8.6 per cent and institutional banking earnings were down a third following the supercharged trading and treasury income in the previous half.
One bright spot remains NAB’s business banking and MLC wealth management unit, confirming the suggestions that business confidence has rebounded.
The UK business also experienced a surprise 24.5 per cent tick-up in cash earnings in local currency terms, suggesting the worst had past in that troubled market, but bad debts – particularly across commercial property is still causing headaches. And profits are still running at just 40 per cent of its potential.