THE DISTILLERY: NAB's British scapegoat

Jotters deliver mixed appraisals of National Australia Bank's interim results, with some saying it can't blame shortfalls on its UK assets alone.

National Australia Bank's earnings may have been roughly in line with forecasts, but there's a wide divergence of views among the commentariat on the matter. This morning the bank is variously portrayed as a laggard, a shining light and a victim of international economic weakness.

Fairfax's Malcolm Maiden sums it up rather succinctly.

"NAB is a very good Australian banking business with a very ordinary British banking business attached...Take out NAB's Clydesdale and Yorkshire banks in Britain and ignore losses from the stressed British commercial real estate loan book that NAB is now managing on its own balance sheet and the picture is different. NAB's cash earnings would have increased by 7.7 per cent to $3.08 billion in the latest half without them, and would have been $530 million or 21 per cent higher over two years."

However, The Australian's Richard Gluyas isn't swayed by the argument.

"[The 3 per cent increase in half-year dividend] is the true measure of NAB's underperformance, and it matters little to investors that the bank's return on equity climbs to a competitive 17.7 per cent if Britain is excluded. All the market sees is a crippled British economy that only narrowly avoided a triple-dip recession reporting better-than-expected 0.3 per cent growth in the March quarter."

Similarly, Gluyas' papermate Tim Boreham can't help but compare NAB to its better-performing competition.

"At the risk of being harsh, the National Australia Bank has perpetuated its reputation as the laggard bank, with interest margins, revenue growth and bad-debt performance all lagging its peers."

At Fairfax, Malcolm Maiden takes a broader, more upbeat view. He characterised NAB's result as a "positive surprise" that shines a light on the peculiar good fortunes of the big four.

"The bottom line is that the banks continue to be a curious sweet spot. Loan growth is lacklustre by the standards of the years ahead of the global crisis, running at about a quarter of its pre-crisis peak growth pace. Loan growth of 4 to 5 per cent is combining with efficiency measures that are driving cost-to-income ratios down to keep profits driving higher, however. The banks can churn results like the ones they have just announced for some time. Only a collapse in economic activity threatens them. And while that is not impossible as the resources investment boom ends, it is improbable."

The Australian Financial Review's Chanticleer columnist, Tony Boyd, tends to agree: "There are many conflicting signals about the economy coming out of the latest round of bank profit results but there is nothing to suggest the major banks cannot continue to deliver earnings and dividend growth."

The other big corporate focus this morning is Rio Tinto, after chief executive Sam Walsh was forced to defend a dividend policy some investors think is too stingy. 

Fairfax's Elizabeth Knight gives some weight to the miner's shareholders.

"[Walsh's] remit is not about buying growth but reducing costs from head office to the mine site. It's all about discipline and shareholder returns. And this is just what these institutional investors will be reminding him about in their meetings."

At Business Spectator, however, Stephen Bartholomeusz favours capex and stronger balance sheets over dividends.

"Provided the big miners can generate better long-term returns from the capital they generate than would be generated from cash in their shareholders’ hands, it makes sense to retain earnings and invest that internally-generated capital in high-quality projects. It makes even more sense to ensure that their balance sheets are shock-proof, given the amplitude of the volatility they have and are experiencing and the uncertainty over the economic path ahead for China."

Elsewhere, The Australian's M&A whiz Bryan Frith offers a comprehensive rundown of Billabong International's tough year trying to attract a buyer, culminating in the company's suspension from trade yesterday as it continued talks with its latest suitor, Sycamore Partners. As he rather aptly sums up: "Billabong chairman Ian Pollard must have one of the toughest jobs going at present."

Finally, Fairfax's Adele Ferguson is looking forward to another deal: the float of Quadrant Private Equity's Virtus Health on June 11. Not only is it the biggest offering the ASX has seen for a while, she says it's also an important test case for other private equiteers waiting to come to market.

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