NAB admirably shoulders a UK burden

The National Australia Bank interim result was solid rather than impressive, which is not such a bad outcome given it's still carrying considerable UK banking baggage.

In fact, on a March-on-September half basis rather than a March-to-March comparison the result was somewhat better than solid. The 3 per cent gain in cash earnings on the previous March half was an 11.9 per cent improvement on the September half-year.

As with its peers, NAB benefitted from a good performance on costs, which were down 2.6 per cent relative to the September half and marginally down on the March half last year.

There was also a big (26.4 per cent relative to the September half and 3.4 per cent March-on-March) reduction in bad and doubtful debt charges thanks to an improvement in the experiences of its UK bank and its core business bank.

The result does underscore why Cameron Clyne dialled down the 'Breaking Up' campaign’s impact last year by reducing the gap between the pricing of NAB’s home loans and its peers to negligible levels.

The re-pricing of its mortgages helped NAB’s retail bank improve its net interest margin by five basis points relative to the September half and seven when compared with the March half last year. While that led to a 19.2 per cent increase in its cash earnings from the same half last year, its contribution was actually down 4.8 per cent when compared with the September half despite a 4 per cent increase in revenue and good cost control.

NAB’s core business banking franchise produced an 8.3 per cent lift in cash earnings when compared with the September half but a marginal decrease on the March half last year even though there was a material fall in bad and doubtful debt charges.

Revenue from the business bank has essentially been flat-lining in an environment where business demand for credit has been very weak as the strength of the dollar and poor confidence levels across the economy have undermined large slabs of business activity.

Clyne would have been pleased that the UK operations were profitable – they generated about $62 million of cash earnings against losses of about $173 million in the September half and about $38 million in the previous March half – although the losses within the UK commercial real estate portfolio now carried on the parent company balance sheet were about $226 million.

While that’s an improvement on the $380 million or so incurred in the September half it does indicate the continuing drag on the group’s performance created by the UK exposures and the deteriorating UK economic environment.

At least, while still deteriorating, the asset quality of that portfolio is doing so at a slower rate and the size of the portfolio continues to shrink, with a near $1 billion run-off in the half.

Were it not for the UK baggage, NAB’s performance would be considerably better – its earnings would be almost 8 per cent more than for the same half last year rather than 3.1 per cent. Its return on equity of 14.7 per cent would also be materially higher – perhaps 300 basis points higher – rather than lagging its peers.

As is the case for all four of the majors, NAB is well capitalised, has a sound funding structure and is well-provisioned.

Despite producing a result more or less in line with market expectations, however, the market response was unenthusiastic, perhaps because NAB increased its interim dividend by 'only' three cents a share where ANZ and Westpac surprised the market with their largesse.

Clyne, having just presided over a shake-up of his management and outlined a technology-driven productivity drive that could fundamentally re-base NAB cost structures would, however, be relatively pleased with the result given the UK legacy and the reality that his bank has a greater exposure to business banking than his peers.