Signs of life in UK economy bolster NAB

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

National Australia Bank's troubled British 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 British arm, which has been a consistent drag on earnings, benefited from improving credit quality, as the country's nascent economic recovery accelerated.

In its so-called "bad bank" in Britain, 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 portfolio was ahead of schedule, with the total balance of loans falling from £5 billion ($8.6 billion) to £4.4 billion in 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 over a mis-selling scandal.

Chief executive Cameron Clyne argued the bank was delivering against 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 Limited in October 2012."

In Australia, NAB said retail banking profits were higher and it had increased market share - a trend Mr Clyne credited to its push to cut the cost of consumer banking.

Its 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 big bank rivals.

Bell Potter analyst T.S. Lim said the British pick-up was promising, as were the retail business results.

"I think the personal bank has turned the corner," Mr Lim said. "They are not as aggressive as before, which, in a way, is good for margin."

Despite the positive signs, the results show total revenue growth was slow, at just 1 per cent, outpaced by 2 per cent growth in expenses. Revenue in NAB's flagship business lending arm fell, though this was offset by a lower charge for bad and doubtful debts, it said.

Mr Clyne said conditions in business lending - where NAB has the largest market share of the big four - were "challenging".

NAB shares rose 0.7 per cent to $31.57.

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