NAB

National Australia Bank’s first quarter trading update (the company has a 30 September year end) produced no surprises. Cash earnings were $1.4bn, up slightly from $1.3bn in the last three months of 2010. At first blush that’s a fine result. Particularly in light of the net interest margin falling from 2.28% to 2.19%, due to weak credit growth, higher interest costs and higher bad debts in the UK.   

By offering lower home loan rates than its Australian rivals, National Australia’s mortgage volumes increased 2.42 times faster than the industry. While that’s provided a short-term boost to earnings, there’s an increased risk of higher bad debts in the future. As bad debt provisions are now back to low levels following the GFC, there’s less protection against a housing downturn.

We’d feel more comfortable if the company focused on selling more products to its Australian customers, sold the lousy UK banking business and exited risky lines of business, such as synthetic collateralised debt obligations. Given the leverage involved, banking is best kept simple, especially when you’re one quarter of a government-sanctioned oligopoly.

Though we’re still a long way from a positive recommendation, with the share price falling 11% since Big banks & the Basel hoax Pt 2 on 9 Nov 11 (Avoid – $25.83), we’re switching back to HOLD.