Trust British banks? NAB sure can't
NAB's March-half cash earnings of $2.9 billion were 3.1 per cent higher than they were a year earlier, and the group posted a return on equity of 14.7 per cent. That put it at the bottom of the big four league table. ANZ posted a return on equity of 15.5 per cent in the March half, Westpac boosted its ROE from 15.1 per cent to 16.1 per cent, and CBA returned 18.1 per cent in its December half year.
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.
NAB chief executive Cameron Clyne also said on Thursday that excluding Britain, NAB's return on equity was 17.7 per cent in the March half. Stripped of its British problem, NAB is close to top of the class for profitability in other words, despite being the most exposed of the big four banks to the small and medium-sized business sector that is burdened by a high Australian dollar and tepid consumer demand.
The problem is NAB's British canker cannot be easily cut out. The commercial real estate portfolio is in rundown mode, and since April last year has declined by £1 billion ($1.5 billion) to £5 billion. It will take five years or so to eliminate, and while it is there, group profits will be affected by how many of the loans go bad.
Bad debt charges against the commercial real estate loan book in the March half totalled £185 million, swamping earnings of £41 million in the British banks themselves. And while the British banks would be sold in a flash if NAB fielded a realistic offer, they are operating in an economy that the conservative British government has belted into submission.
Spending cuts aimed at aggressively lowering British government debt in the wake of the global crisis have combined with the economic down-draft of the crisis itself to push Britain into recession twice since 2008. A third recession (two quarters of negative growth) was narrowly avoided in the March quarter of this year, when the economy expanded by an anaemic 0.3 per cent.
The British economy is still 2.5 per cent smaller than it was in 2008, and its prospects are unclear. It is not the sort of operating environment that lures buyers, and even if Clyne did pull a rabbit out of the hat and sell the British banks, he would still have the commercial real estate book to deal with.
Bank shares have risen by 24 per cent this year and by 39 per cent in a year, and on Thursday after NAB reported its result, news of strong Australian jobs growth in April saw shares in NAB, ANZ and CBA fall, by 2.1 per cent, 2.8 per cent and 0.3 per cent respectively. More than 90,000 people found work in February, March and April, and the theory is that if this is the beginning of an economic rebound, stocks tied tightly to the economic cycle will get buying support and high-yield shares like the banks will get less. Telstra shares were down 0.8 per cent on Thursday on the same line of thinking.
The March-half profit results from NAB, Westpac and ANZ confirmed that the "new normal" of mid-single-digit loan growth after the global crisis is far from fallow ground, however.
KPMG estimates that, including CBA's December half-year, the big four banks boosted first-half earnings by 7.2 per cent to $13.4 billion, after cutting costs from 47.5 per cent of income to 44.7 per cent and cutting loan impairment expenses from $3.2 billion to $2.8 billion.
The share price rally this year has driven bank dividend yields down from about 10 per cent after franking credits to about 7 per cent, but the profit rises and dividend increases are still flowing. ANZ boosted its interim dividend from 66¢ to 73¢, Westpac bumped the dividend by 2¢ to 86¢ a share and announced a special 10¢-a-share payout, and NAB bumped its interim dividend up by 3¢ a share to 93¢.
mmaiden@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
NAB reported March‑half cash earnings of $2.9 billion, which were 3.1% higher than the same period a year earlier. The group's return on equity for the half was 14.7%, placing it at the bottom of the big four banks on that measure.
Excluding NAB's British banks (Clydesdale and Yorkshire) the picture improves: cash earnings would have risen 7.7% to $3.08 billion in the latest half, and over two years would have been $530 million (21%) higher. NAB also said its return on equity excluding Britain was 17.7% in the March half.
NAB's British commercial real estate portfolio is in rundown mode. Since April last year it has fallen by £1 billion to about £5 billion and NAB expects it will take around five years or so to eliminate. While it remains on the balance sheet, group profits will be affected by how many of those loans turn bad.
Bad debt charges against NAB's British commercial real estate loan book totalled £185 million in the March half, which overwhelmed earnings of £41 million generated by the British banks themselves in that period.
Bank shares have had a strong run — up about 24% this year and 39% over a year — but after NAB reported and news of strong Australian jobs growth in April, shares fell: NAB down 2.1%, ANZ down 2.8% and CBA down 0.3%. The same jobs data also saw Telstra fall about 0.8%.
KPMG estimated that, including CBA's December half, the big four lifted first‑half earnings by 7.2% to $13.4 billion. That came alongside cost cuts (costs fell from 47.5% of income to 44.7%) and lower loan impairment expenses (down from $3.2 billion to $2.8 billion).
The share price rally has pushed bank dividend yields down from about 10% (after franking credits) to roughly 7%. Nevertheless, the banks have raised payouts: ANZ's interim dividend rose from 66¢ to 73¢, Westpac increased its interim dividend by 2¢ to 86¢ and added a special 10¢ payment, and NAB raised its interim dividend by 3¢ to 93¢.
Even though the British banks might attract buyers if offered realistically, the operating environment is weak: Britain has had two recessions since 2008, its economy remains about 2.5% smaller than in 2008, and recent growth has been anaemic. That makes prospective buyers cautious, and selling the banks would not remove the commercial real estate loan book that NAB still has to manage.
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