NAB on track for bumper $6b profit

National Australia Bank's troubled UK arm is showing tentative signs of improvement, with bad loans falling as the nation's economy gradually emerges from a funk.

In a trading update on Tuesday, the lender said bad and doubtful debts fell 10 per cent to $489 million in the latest quarter, led by better credit quality in Britain and its business banking division.

The recovery occurred as cash earnings in the third quarter rose to $1.5 billion, an annual increase of 7 per cent, putting the bank on track to post annual profits of more than $6 billion.

The UK arm, which has been a consistent drag on earnings, benefited from improving credit quality, during which the country's nascent economic recovery accelerated.

In its so-called "bad bank" in the UK, which houses a bundle of soured commercial property loans, earnings improved due to higher revenue and lower bad debts.

The bank said its plan to run off the troubled portfolio was ahead of schedule, with the total balance of loans declining from £5 billion to £4.4 billion during the quarter.

In the rest of its British business, cash earnings were "broadly stable," as lower bad debts and better revenue were offset by higher charges for provisions for misconduct relating to a mis-selling scandal.

Chief executive Cameron Clyne argued the bank was delivering on its strategy to wind down its troubled portfolio in Britain.

"Progress on simplification of our UK banking business has been pleasing, with efficiency benefits ahead of plan," he said. "We have also achieved further run-off in the UK commercial real estate portfolio with the current balance of £4.4 billion down £1.2 billion since its transfer to National Australia Bank Ltd in October 2012."

In Australia, NAB said profits from retail banking were higher and the bank had increased its market share - a trend Mr Clyne credited to its push to cut the cost of consumer banking. NAB's share of the mortgage market has risen to 15.3 per cent after an aggressive push to cut fees and offer lower advertised rates than its big bank rivals in recent years, though ANZ is now offering the same standard variable mortgage rate.

Bell Potter analyst T.S. Lim said the pick-up in Britain was promising, as were the better results in its retail business. "I think the personal bank has turned the corner. They are not as aggressive as before, which in a way is good for margin," he said.

Despite the positive signs, the results also show total revenue growth was slow at just 1 per cent, outpaced by 2 per cent growth in expenses. Shares rose 0.7 per cent to $31.57.