NAB’s Clyne Sees ‘Challenging’ 2013 as Rate Cuts Misfire

National Australia Bank Ltd. (NAB) faces a challenging year ahead amid subdued economic growth and as interest rate cuts do less to revive mortgage demand than hoped, said Cameron Clyne, the lender’s chief executive officer.

The central bank’s 1.5 percentage points of reductions to Australia’s key interest rate over the past year are being blunted because consumers know the cuts are prompted by fears of economic weakness, Clyne told a media briefing in Sydney today. National Australia Bank’s full-year profit tumbled 22 percent in the year through September as a weak U.K. economy forced the bank to set aside more money for bad debts, the Melbourne-based lender said.

Lowering benchmark borrowing costs “does have an impact but it’s not always entirely stimulatory,” Clyne said. “It’s likely to be a challenging 2013,” as each year has been in recent times, he said.

National Australia Bank, the worst performing stock among the country’s major lenders in 2012, reported its first full- year profit decline since 2009 today. Charges for debts that may sour rose 44 percent, fueling a loss at the U.K. unit, while business banking profit dropped.

Net income sank to A$4.08 billion ($4.2 billion) in the period, missing the lowest of six analyst estimates compiled by Bloomberg, which averaged A$4.83 billion.

The lender’s shares dropped 0.4 percent to A$25.79 in Sydney today, while the benchmark S&P/ASX 200 Index rose 0.7 percent.

Bad Debts

Australia’s private-sector loan growth has been subdued over the past year, crimping demand in the retail bank’s core market. Sales of newly built homes declined for a third straight month in September, according to the Canberra-based Housing Industry Association.

National Australia Bank’s net interest margin -- a measure of the profitability of its lending -- fell 11 basis points in the six months ended Sept. 30 to 2.06 percent, the company said.

Cash earnings at the lender’s business banking unit dropped 1.5 percent on higher bad debt charges. Across the group, such costs rose to A$2.6 billion.

“Unemployment is rising and we’ve got a number of businesses going to the wall at the moment,” Angus Gluskie, managing director at White Funds Management Pty. in Sydney, said by phone. “We need to see a broader economic recovery here before that risk diminishes,” he said, referring to the prospects for increased bad debts.

The Australian lender, owner of Scotland’s Clydesdale Bank and the Yorkshire Bank, increased its charges for soured loans from the U.K. unit by 335 million pounds ($539 million), after restructuring the division this year to shift a 5.6 billion pound commercial real estate portfolio to the group balance sheet.

Fresh Look

The restructure of the U.K. unit, announced April 30 along with plans to cut 1,400 jobs, had led the bank to reassess the quality of the division’s loans, Mark Joiner, chief financial officer, told an investor briefing today.

“You’ve got new eyes looking through it and that’s probably bringing more realism to bear,” he said.

The U.K. unit had a cash earnings loss of 139 million pounds for the full year, National Australia Bank said today, as that country’s economy shrank for three straight quarters before rebounding to its best rate since 2007 in the most-recent period.

The lender “faces the risk of persistent earnings downgrades” in a weak U.K. economy, Credit Suisse Group AG’s Sydney-based analyst Jarrod Martin wrote in a note to clients Oct. 22. “We see a risk of further U.K.-related provision top- ups from NAB in future periods.”

Subdued Growth

The decline in National Australia Bank shares today pared their advance this year to 10 percent. That’s the smallest gain among Australia’s four largest lenders.

Australia & New Zealand Banking Group Ltd. (ANZ) has jumped 24 percent, Commonwealth Bank of Australia (CBA) has gained 17 percent and Westpac Banking Corp. (WBC) has climbed 28 percent since Dec. 31.

Profit for the second half of A$2.03 billion fell 27 percent from a year earlier. The charge for bad and doubtful debts was A$1.48 billion in the second half, up 31 percent on the figure on March 31, the bank said.

The bank’s core Tier 1 ratio, a measure of its ability to absorb losses, rose to 8.29 percent as of Sept. 30, assessed under so-called Basel II requirements, from 8.03 percent six months earlier.

Cash return on equity, a measure of National Australia’s ability to generate profits from its net assets, fell 1.5 percentage points to 13.5 percent for the six months to Sept. 30, from 15 percent in the previous half.

To contact the reporter on this story: David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net

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