Shackled NAB bumbles along

National Australia Bank is feeling the pinch from weak credit demand, higher funding costs and a UK recession. But it is also scoring wins from marketing, cost reductions and its deposit surplus.

If the major banks’ results are reflective of the broader economic environment then National Australia Bank’s third quarter trading update would suggest not much is happening out there.

Whether by comparison with the same quarter of last year or the run-rate established in its first half, NAB’s cash earnings, at $1.4 billion, flatlined.

In fact its revenue was actually down 1 per cent, offset by a lower bad and doubtful debt charge and strong cost management.

That there is no earnings momentum within the bank isn’t surprising. Demand for credit is weak, with businesses and consumers highly defensive, funding pressures are still there as the majors’ compete for deposits and market-related income isn’t as easily generated as it has been in the past.

The subdued conditions explain why all the majors are focusing intensely on costs – NAB has managed a three percentage point reduction in its costs over the past two years – as the earnings lever that they at least have some control over.

Within NAB’s results there does, at least, appear to be continuing progress within its personal banking franchise, where the ‘’Breaking Up’’ campaign continues to drive improvements in customer satisfaction and revenue.

NAB says that since it launched that campaign it has added a million customers. Whether that growth is also having a positive impact on margins won’t be known until NAB’s full-year results are detailed in late October, although NAB did say that it had experienced improved margins and volume growth in its mortgage business.

The core business banking franchise was affected, NAB said, by higher funding costs and an increase in the charge for bad and doubtful debts. NAB did announce an increase in the liquidity margin for some business bank products last month which may help, at the margin, its fourth-quarter performance.

It is an indication of how weak business demand for credit is that the lending NAB did do in the quarter was more than fully funded by deposits – NAB said it had surplus deposits of $8 billion for the quarter. That’s good for its liquidity and the stability of its funding but isn’t necessarily a positive for its earnings.

NAB’s point of difference, and vulnerability, relative to its peers is its troubled UK franchise, where it has made major write-offs and created substantial provisions as it embarks on a radical restructuring of its UK banks.

With the UK economy in recession, UK funding costs higher and high levels of non-performing loans it isn’t surprising that the UK bank's earnings were lower than the run-rate for the first half.

Unless and until customer confidence improves none of the majors would expect to generate anything other than modest earnings growth in the current environment and none of them expects a return to the pre-GFC levels of credit growth any time soon, if ever.

With the increased capital and liquidity levels dictated by the environment and the tougher regulatory requirements and elevated funding costs relative success is going to be defined more by how well they can manage down their cost base and maintain credit quality rather than by how much they can grow their balance sheets.

The rekindled enthusiasm for a new inquiry into the banking system, based on the questionable premise that the post-GFC system isn’t competitive and the majors are profiteering, is unlikely to get much supporting evidence from this year’s round of big bank results.