NAB's troubled UK unit shows signs of life

THE National Australia Bank has raised hopes that its struggling British business may have put the worst behind it, with group cash earnings climbing to $1.45 billion despite challenging economic conditions in Australia and overseas.

After enduring falling profits and mounting shareholder discontent last year, the bank showed tentative signs of recovery in its profit update for the December quarter on Thursday.

The British business, which has been plagued by losses and become a key concern for investors, reported better earnings due to lower charges for bad debts and lower costs.

Although NAB said economic conditions in Australia and Britain were challenging, cash earnings were up about 4 per cent across the group, as the bank benefited from wider lending margins and a fall in bad debts among its core business customers.

The chief executive, Cameron Clyne, said the rise in earnings also reflected the underlying strength of its Australian business, where NAB experienced wider margins.

"This is a pleasing result, especially given operating conditions remain challenging both in Australia and the UK, notwithstanding recent improvements in financial markets," Mr Clyne said.

Investors welcomed the result, pushing up NAB shares by 1.8 per cent to $28.63.

The result also pointed to healthy profits in Australia.

Margins across the group rose in the quarter, during which NAB and other majors failed to pass on cuts to the cash rate in full to mortgage borrowers.

A senior analyst at BBY, Brett Le Mesurier, said the higher margins reflected the mortgage pricing strategy used by NAB and the other majors, as well as developments in funding markets.

The result comes as banks grapple with weaker credit growth, prompting a renewed focus on costs.

NAB's costs rose 4 per cent over the quarter, but Mr Clyne said this needed to be balanced against the need for it to invest in new technology. The bank cut 500 full-time equivalent staff in its British business during the quarter and closed 38 branches, after a review last year.

Charges for bad and doubtful debts fell by 10 per cent, to $554 million, with this improvement occurring among its business customers.