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National Australia Bank’s Profit Rises 7.7% on Higher Share of Mortgages

National Australia Bank Ltd.’s cash profit climbed 7.7 percent in the first quarter as it increased lending faster than rivals, even as the profitability of loans waned on higher wholesale funding and deposit costs.

Unaudited cash earnings for the three months ended Dec. 31 rose to A$1.4 billion ($1.5 billion), the Melbourne-based bank said in a statement today. That compares with the A$1.3 billion profit reported in the same period a year earlier. Unaudited net profit was about $1.6 billion, the bank said.

Shares of Australia’s biggest lender to companies fell the most in three months after Chief Executive Officer Cameron Clyne, facing the weakest demand for mortgages since 1977, said earnings were hurt by lower lending margins and a jump in bad debts in the U.K. Clyne today announced a strategic review of U.K. banking due by May as that nation’s recovery is delayed.

The result was “disappointing,” said David Ellis, head of banking research at Morningstar Inc. in Sydney. “Strong volume growth in both loans and deposits was offset by higher deposit and wholesale funding costs.”

National Australia shares extended declines after the central bank unexpectedly kept its benchmark interest rate unchanged at 4.25 percent, confounding the forecast of 24 of 27 economists surveyed predicting a quarter-point reduction. The shares fell 4 percent to A$23.21 in Sydney, the biggest drop since Nov. 10.

Funding Costs

“Higher deposit and wholesale funding costs, softening credit growth and fragile economic conditions continued to be key characteristics of the operating environment in most of the regions in which NAB operates,” Clyne said in today’s statement.

National Australia said its net interest margin, a measure of the profitability of its lending business, narrowed in the quarter to 2.19 percent from 2.28 percent in the half-year to Sept. 30.

Australia’s banks faced increased scrutiny by lawmakers and consumers ahead of today’s central bank rate decision, with government ministers including Treasurer Wayne Swan telling the banks to pass on in full any cut by the Reserve Bank of Australia.

National Australia pledged to offer the lowest standard mortgage variable home rate among the nation’s biggest banks in 2012, Lisa Gray, group executive of personal banking, said in a separate statement today. The bank said its rate of 7.22 percent is below competitors Australia & New Zealand Banking Group, Commonwealth Bank of Australia and Westpac Banking Corp.

Political Pressure

Clyne drew criticism from Swan in November when he didn’t pass on to customers all of the central bank’s quarter-point cut to its benchmark interest rate. National Australia was also among banks that delayed by days announcing in December a decision to match the central bank’s similar cut.

The personal banking division continued to increase mortgage volumes and market share, growing at 2.42 times the total market, the bank said.

While Australia’s biggest banks have cut their reliance on credit markets as local households save at close to the highest rate in a quarter century, debt markets still furnish about 40 percent of the funds they use for lending.

National Australia said it raised about A$7 billion of wholesale funding, including about A$4 billion of covered bonds. The weighted-average term to maturity of the funds raised was 4.7 years.

Slowing Demand

Central bank figures show credit to Australian home buyers rose 5.4 percent in December from a year earlier, the smallest annual increase since 1977, when the data begin. The gain is about a third of the average monthly pace recorded in the decade to December 2009.

The weakening demand for loans may force Australia’s banks to cut 7,000 jobs in the next two years to reduce labor costs that account for 58 percent of expenses, UBS AG said last month.

Westpac, Australia’s second biggest lender, said last week as many as 400 people will lose their jobs. ANZ Bank is preparing to cut as many as 900 positions, according to the Finance Sector Union, which represents bank workers.

Clyne said today that the U.K. economy is likely to “experience a much longer period of subdued growth” and that a recovery is “now a longer-term prospect.”

“NAB has commenced a strategic review, and will work with U.K. management to appropriately reposition its business mix and structure for the changed economic environment and improve returns,” Clyne said. “We will inform the market of the outcomes of the review, which we expect to occur by the time of our interim result in May.”

The number of group loans more than 90 days overdue was “stable” at 1.78 percent on Dec. 31 compared with Sept. 30.

National Australia’s Tier 1 capital ratio, a measure of its ability to absorb potential losses, rose to 10.02 percent from 9.7 percent on Sept. 30, the bank said. The core Tier 1 ratio was 7.89 percent, it said.

To contact the reporter on this story: Jacob Greber in Sydney at jgreber@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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