NAB: Result 2013

National Australia Bank couldn’t quite reach the magical milestone of producing a $6bn profit for the year ending 30 September, but it was an encouraging result. Revenue increased 2% to $18.6bn and the company’s preferred measure of cash earnings increased 9% to $5.9bn, with bad debts falling 26% to $1.9bn. Cash earnings per share increased 5% to $2.53 and a final fully franked dividend of 97 cents was declared (ex date 7 Nov), up 8%. That brings the annual total up to $1.90, up 6%, for a dividend yield of 5.4%.

Net interest income, which is a key long-term driver of profits, increased less than 1% to $13.4bn, as the net interest margin fell from 2.11% to 2.02%. That shows how important the massive drop in bad debts (chiefly in the UK) was for the bottom line. With the UK economy finally showing signs of life and the property market heating up again, chief executive Cameron Clyne may have an opportunity to reduce the £4.0bn of problematic UK real estate loans without suffering any major losses. It’s the same playbook that worked so well for Suncorp in recent years.

With National Australia’s share price up 9% since NAB: Q3 Result 2013 from 21 Aug 13 (HOLD – $32.12), the company’s price-to-tangible book value is 2.4. It hasn’t reached this lofty level since the period 2005-2007, in turn diminishing the valuation gap between our preferred picks Commonwealth Bank and Westpac.

National deserves to trade at a discount due to its smaller deposit base and larger business loan book, but in the short-term it has an opportunity to increase earnings quicker if it can reduce bad debts, chiefly from the UK loan book. We’ve slightly increased the prices in the recommendation guide to give Clyne more time to rid the bank of its problems in the UK, but if the company has become a large part of your portfolio then now’s the time to consider taking some chips off the table. HOLD.