NAB: Q3 Result 2014

Once again National Australia Bank’s result for the nine months ending 30 June (NAB has a 30 September year end) was overshadowed by higher costs and provisions for the problematic UK businesses. Unaudited cash earnings increased 7% to $1.6bn, with growth slowing from 9% at the half-year. Revenue fell 1% but it was due to lower trading income, which bounces around.

Excluding the transient impact of UK customer conduct costs expenses fell an impressive 6% and bad debts fell 9% as low interest rates assist Australian borrowers and the UK economy improves. NAB’s UK problem loans have fallen to £3bn, though problems in the UK have flared up again.

Nearly half a billion dollars of charges and provisions may be included in ‘the full year result for both interest rate hedging products and [inappropriate sales of] payment protection insurance. In addition, the Scottish Independence vote takes place on 18 September and a vote in favour of independence may give rise to significant additional costs and risks for Clydesdale Bank.’ While new chief executive Andrew Thorburn will offload the problematic UK businesses and loans first chance he gets, it might not be easy until the temporary issues are resolved.

While NAB’s Australian operations aren’t as high quality as Commonwealth Bank’s or Westpac’s they’re better than the company’s current overall results suggest, which will become clear once Thorburn deals with the UK assets. NAB’s share price has increased slightly since Big banks results round-up from 19 May 14 (Hold – $33.49) and it remains a HOLD.

Our maximum recommended portfolio limit for the banking sector is 20%, although conservative investors might consider a limit of less than 10% at current valuations, particularly if you have other large exposures to residential property.