A dark shadow over NAB's result

It can't be easy being Cameron Clyne. If he could somehow excise the UK banks he inherited the National Australia Bank chief executive would be reasonably satisfied with the group's result in what remain difficult conditions.

Of course he can't wish those UK banking assets away and with the UK economy in recession and its property markets depressed they cast a dark shadow over NAB's results and will continue to do so for some years to come as the group runs off the $9 billion or so of troubled property loans it transferred out of Clydesdale in the UK and into its own balance sheet earlier this year.

It was the near-$800 million increase in its charge for bad and doubtful debts, which included a $250 million increase in its economic cycle provisioning, that disfigured NAB's results and masked a solid performance from its core domestic banking businesses.

Holding cash earnings virtually steady was, given the weight of the distress within the UK business, a significant achievement, although there was a material downturn in the second half as the contribution from the group's key franchise, business banking, slipped and the UK performance impacted.

If the UK results could be ignored, NAB's results over the past two years, in an environment of modest credit growth and significant pressure within the non-resource sectors of the economy, would be regarded as quite solid, with compound annual growth in cash earnings over that period of 14 per cent.

The bright note in the result for Clyne would be the performance of his retail bank. The controversial price-driven drive for market share in that business, a strategy whose sustainability has been questioned, was modified as the year progressed and the mortgage rate differential between NAB and its peers narrowed to the point of insignificance.

In the first half that business' earnings were squeezed by the margin compression NAB incurred as the price of pursuing volume and market share growth.

As NAB's pricing policy evolved, however, it recovered margin – its full-year net interest margin in that business, while 16 basis points lower than the previous year, rose 2 basis points in the September half – while still experiencing strong revenue and earnings growth. Earnings for the retail bank were up 25.2 per cent in the half.

It is NAB's business bank, however, that remains its core and, perhaps unsurprisingly in the conditions, it flat-lined, with its cash earnings actually slipping 1.5 per cent. With little volume or income growth, some margin pressures and a material tick up in impaired loans, although its 90-days past due and gross impaired assets as a proportion of its portfolio is actually continuing to trend down.

A stable performance from its wholesale banking and wealth management activities and a strong contribution from New Zealand helped blunt the impact of the UK woes, but NAB's cash return on equity fell from 15.2 per cent to 14.2 per cent, which probably won't compare favourably with its peers (although most other banking system in the world would love an ROE of more than 14 per cent).

Funding costs in the are UK still elevated and there are several years to go before the portfolio of Clydesdale's bad assets that was transferred to the parent's balance sheet can run off to the point where it ceases to be material, assuming all goes according to plan.

There's little Clyne can do about the dead weight the group is carrying other than trying to ensure that, within the very tough and risk-laden climate in the UK and Europe, the UK businesses is managed to avoid any further meaningful risks and shocks while NAB awaits a better opportunity to deal with it more conclusively. In the meantime, he needs the Australasian core of the group to perform solidly and predictably, which it does appear to be doing.