National Australia Bank chief Cameron Clyne says ongoing uncertainty over its troubled operations in Britain will not dissuade buyers of the operations, as further charges offshore and slowing revenue in Australia weighed on the lender’s interim earnings.
Higher losses from mis-selling products in Britain and a slide in group margins stained NAB’s 8.5 per cent rise in cash profit to $3.15 billion for the six months to March 31, which was just shy of expectations.
Mr Clyne’s strategy to “de-risk” its business lending book by shunning risky exposures drove a 52 per cent fall in bad debt charges compared with the same period last year, but also led to weaker revenue.
The NAB announcement wrapped up the banks’ interim results season, with NAB, ANZ, Commonwealth Bank and Westpac posting record cash profits of $14.7bn, up 10 per cent. The result comes as the financial system inquiry prepares to hand down its initial findings on issues such as competition and regulation in July.
While NAB’s British banking operations, the Clydesdale and Yorkshire banks, improved earnings due to a fall in soured loans, NAB was forced to inject an additional £300 million ($542m) of equity into the division to boost capital levels.
Charges from mis-selling interest rate hedging products and tailored business loans rose 91 per cent to £128m, including additional provisions.
The “conduct related” issues have plagued the British banking sector since 2011, costing lenders about £20bn after they were found to have not provided sufficient detail to customers and added payment protection insurance to mortgages without consent.
But Mr Clyne said the conduct problems would not deter potential buyers of its British arm, given the problem was industry-wide and not new.
Investors have long yearned for NAB to offload the British unit due to the hit to group returns, but Mr Clyne has opted to work through the challenges rather than take a hefty loss through a fire sale. “It’s a known issue, an industry issue, so I don’t think it’s necessarily a factor in whether or not people are interested in acquiring Clydesdale,” he said of the conduct woes.
“It would become a point of negotiation in the due diligence.”
Mr Clyne acknowledged that his successor from August, Andrew Thorburn, would take the reins at a challenging time, given uncertainty about the ultimate cost from bad conduct, and soft demand from businesses for credit and stricter capital rules in Australia.
“He’s going to have challenges of course ... so did I,” Mr Clyne, who became CEO in January 2009, told The Australian after handing down his last result.
“But the more he can focus on the challenges of the future and the less he has to dig through challenges of the past, that’s helpful. There’s no question the business is stronger than it was 5½ years ago.”
Despite the conduct charges, NAB’s British banking arm boosted cash earnings 121 per cent to £73m as its loan book improved, while its portfolio of commercial real estate loans being run off posted a lower loss.
NAB’s newly formed Australian Banking division, comprising retail, business and wholesale, increased cash earnings 1 per cent to $2.5bn as revenue fell 1 per cent on weaker margins, partly blamed on increased competition.
“Things are heading in the right direction, but they were definitely less favourable than people had expected,” White Funds managing director Angus Gluskie said.
“(People) do want to see some resolution of the UK because that changes the character of the stock. That’s viewed as the strongest potential return driver and people ideally would like to see faster progress.”
NAB handed yield-hungry investors a fully franked dividend of 99c, up 6c. NAB shares were sold off ahead of the result and rose 30c to $34.14 in a good session for all the banks.
NAB has the biggest market share of lending to businesses and rivals, particularly ANZ, have been taking some share as they seek leverage to improving confidence levels. NAB’s net interest margin slumped a larger than expected nine basis points to 1.94 per cent, the lowest of the major banks. Mr Clyne said revenue growth, bad debts and capital generation were not “mutually exclusive” and he had to make “trade-offs”.
He added that there was broad uncertainty ahead of the budget next week, but was hopeful businesses would eventually break out of their “funk” after long putting off investment.
“The real thing we need to see, putting aside all that competitive noise and who’s doing what, is a fundamental lift in system credit growth,” he said, adding that competition had eased slightly in the past month.
“As the market leader, we will enjoy that. What we’re seeing at the moment is business confidence, but it’s got to translate into activity. Credit demand is yet to respond.”
Amid heightened focus, NAB’s tier-one capital ratio rose 21 basis points to 8.64 per cent. The majors must hold at least 8 per cent by 2016 and NAB said it was targeting a range of 8.75-9.25 per cent, higher than ANZ’s target of 8.5-9 per cent.
Westpac and CBA have not released their targets.
In a fresh blow for the banks, the regulator this week unveiled plans to phase out the capital benefits banks get from gearing up their wealth management arms.
NAB revealed the move would strip 53 basis points from its tier-one ratio, but reiterated it was well placed and would explore “mitigating actions” to counter the impost.
Macquarie analyst Mike Wiblin said NAB was generating strong capital and had the biggest opportunity of the majors to release capital through selling assets “which is much more likely now given an ebullient UK economy”.