Ghosts of mistakes past still haunt Clyne

National Australia Bank boss Cameron Clyne will be hoping a record full-year profit, an improvement in problematic British banking operations and a juicy dividend will boost his ranking among key stakeholders.

It is a big deal for Clyne, who has been in the top job for almost five years and has been subject to low rankings in the Corporate Confidence Index, which benchmarks the perceptions of leading analysts and fund managers against a list of major companies.

It comes as his speculated successor, former Merrill Lynch boss Craig Drummond, joined the bank last week as chief financial officer and strategy man.

Until recently NAB has underperformed the other big four banks, largely due to a decision taken early in Clyne's tenure to keep its British banking business and sacrifice return on equity.

But in the past year NAB has outperformed its rivals, with its shares jumping 38 per cent, compared with a 32 per cent rise for Commonwealth Bank and the ANZ and 35 per cent for Westpac. This has occurred as NAB's return on equity increased by 30 basis points over the year to reach 14.5 per cent.

While its ROE is still below the other big four, it is catching up. NAB should overtake ANZ next year if the British business continues to improve and ANZ's return on equity outside its Australian and New Zealand businesses continues to languish at 10 per cent.

On Thursday, when Clyne announced a record cash profit of $5.94 billion, up 9 per cent, on a 2 per cent growth in net operating income, shareholders started to dump the stock. At the close of trade the stock was down 2.5 per cent.

The fall came as investors drilled into the results and realised the expenses growth exceeded income growth at a ratio of 6:1 from the first half of the year to the second.

A key concern was that its bad debts charge was less than it should have been - it fell 26 per cent to $1.9 billion - to make up for a blowout in expenses. The collective provision fell in the second half as new impaired assets increased.

Clyne had told investors there would be $50 million in restructuring expenses in the second half. It came in at $100 million, which came as a shock, as did a $49 million British customer redress cost.

In addition, its UK run-off portfolio of commercial real estate is still producing new impaired assets and the existing provisions needed to be increased because of overly optimistic valuations.

The Australian business remains the jewel in the crown, particularly personal banking. Cash earnings from personal banking rose 17.5 per cent for the year, and were up 22 per cent between the March half and September half year. It shows Clyne's customer-friendly Australian strategy is working. This division increased market share, profit and returns.

NAB has been at the forefront with home loan discounts, including $1000 cash-back offers to encourage home owners to switch. It helped lift market share in home lending from 15 per cent to 15.3 per cent and housing loans by 4.8 per cent over the past year.

But at the end of the day the big question for each of the big four is where next for growth? Clyne's task is to take ROE from the bottom and beat ANZ. After that is Westpac, which hopes its resuscitation of the Bank of Melbourne brand produces rewards, and Commonwealth Bank, which boasts a ROE of 18 per cent, due to the strength of its Australian banking and wealth management.

Shareholders will reward Clyne if he can improve the UK business. But the greater prize is to sell that business and automatically lift ROE, a move that will push the share price higher and move him out of the bottom quartile of the Corporate Confidence Index.

While the sale remains out of his control, rectifying past mistakes is his task. Investors want improvement, no nasty surprises and a market leader. That's what he's paid to create. We're still waiting.