NAB beats but doesn't stun

If the Australian banking world can be divided into two halves, the higher risk offshore exposed portion appears to be travelling at top speed.

After ANZ's (ANZ) stunning performance earlier this week, National Australia Bank (NAB) this morning delivered an impressive rather than a bumper result with a 9.3% lift in cash earnings to $5.43 billion that, after a massive share price run in recent months, could see a continuation of the profit taking that began yesterday.

For most of the past year, ANZ has been discounted because of the potential risk associated with its push into Asia while NAB has had its troubled UK division act as an anchor on its growth ambitions.

For NAB, however, that may all be about to change. The improved economic climate in the UK has seen a turnaround in the performance of its UK banking division, returning to profit after a horror 2012 while losses on its British commercial real estate books now are decreasing (see Cliona O'Dowd's It's time to diversify offshore).

That raises prospect of a sale of the division, a plan that was abandoned 18 months ago when bidders failed to materialise.

Perhaps one of the most stunning aspects of the results this week has been the remarkable return on equity from both ANZ and NAB. That is despite new regulatory requirements for banks to hold increased capital.

In the past 18 months, NAB has lifted its tier one equity ratio to 8.43% from 7.58% in March 2012 which appears to have not affected the bank's capacity to improve returns.

Like the ANZ, NAB has seen a sharp drop in bad and doubtful debts. NAB also has lowered its risk profile and increased its exposure to home loans with a corresponding drop in exposure to commercial real estate.

Heavily geared towards business lending, NAB showed growth despite the subdued conditions and the improved business outlook bodes well for the future of the division.

If there is one concern that should be noted from NAB's recent grab for market share in home mortgages, it is that it may have taken on loans that could become problems in future years.

For the immediate and medium term, however, those concerns have been allayed by the recent improvement in the domestic real estate market.

If the two foreign exposed outliers among the big four have done so well, Westpac (WBC) and the Commonwealth (CBA), with their overwhelming reliance on the hugely profitable domestic market, are expected to really shine.

Reports this morning that the banking regulator APRA has issued warnings to the banks about their payout ratios should be taken with a grain of salt.

All our major banks have successfully accommodated the shift towards the more conservative Basel III capital requirements and are still generating spectacular returns, allowing for improved dividends and, in some cases, special dividends.

NAB this morning marginally lifted its payout ratio to 75.1% from last year's 74.7%, although the second half ratio rose to 76.1%. The final 97c dividend takes the full year payout to $1.90, up 5.6% on last year, and ahead of expectations.