National Australia Bank Ltd. (NAB), the country’s largest lender by assets, posted an 8.5 percent increase in first-half profit on lower bad-debt charges even as margins shrank to the slimmest in at least 10 years.
Cash profit, which excludes one-time items, climbed to a record A$3.15 billion ($2.9 billion) in the six months ended March 31 from A$2.90 billion a year earlier, the Melbourne-based lender said in a statement today. That just missed the A$3.17 billion mean estimate of seven analysts surveyed by Bloomberg. Net income rose to A$2.86 billion from A$2.47 billion.
Net interest margin, a measure of lending profitability, dropped 9 basis points to 1.94 percent as NAB faced increased competition on all fronts. Chief Executive Officer Cameron Clyne, who is leaving to be replaced by Andrew Thorburn on Aug. 1, has overseen an increase in mortgage market share while the bank’s dominant corporate-lending position has eroded.
“NAB’s credit quality improved materially in the first half, resulting in a lower-than-expected bad-debts charge,” Victor German, a Sydney-based analyst at Nomura Holdings Inc., said by phone. “While the underlying earnings were disappointing, its worth noting that NAB has been a clear laggard over the last couple of months and the stock under most metrics doesn’t look expensive relative to its peers.”
Shares of NAB rose 1.1 percent to A$34.23 at 1:59 p.m. in Sydney, paring losses for the year to 1.7 percent. The benchmark S&P/ASX 200 index has gained 2.4 percent in 2014.
The bank trades at 1.8 times book value compared to an average 2.3 times at its three main competitors, according to data compiled by Bloomberg. It remains the largest lender to companies and the third largest for home loans, trailing Commonwealth Bank of Australia (CBA) and Westpac Banking Corp.
“NAB’s margin deterioration is a lot more severe than its main competitors,” Omkar Joshi, who helps oversee about A$1 billion as an investment analyst at Watermark Funds Management Pty in Sydney, said by phone. “The business bank is losing market share and margins, which isn’t a great place to be in.”
The company’s group margins fell to the lowest in at least 10 years, spokeswoman Meaghan Telford said in an e-mail. Business lending spreads dropped 13 basis points due to competition, while mortgage margins climbed 1 basis point, the bank said in the statement. Both Australia & New Zealand Banking Group Ltd. and Westpac said margins fell when they reported earnings earlier this month.
“The reality is margins are always going to suffer when we’ve got limited volume growth and a lot of pressure,” Clyne said at a news briefing. “That obviously puts the challenge on us to find earnings growth in other ways.”
NAB’s Australian banking unit, which includes its retail bank, business lending and wealth management units, reported a 1.2 percent increase in cash earnings. Its business lending market share fell to 22.8 percent from 24.6 percent a year earlier, while its share of mortgages climbed to 15.4 percent from 15.2 percent.
“You have to be somewhat optimistic,” Clyne said. “If the Australian economy continues to perform, at some point businesses would be able to make the decisions.”
The value of NAB’s Australian mortgages rose 5.8 percent in the six months from a year earlier, the lender said today. That was in line with total Australian home lending growth of 5.9 percent in March, Reserve Bank of Australia data show.
Demand for home loans is increasing after the central bank dropped its benchmark interest rate by 225 basis points since late 2011 to a record low of 2.5 percent and lenders cut mortgage rates to a 4-1/2 year low.
A pickup in housing and resilient employment indicate the central bank’s rate cuts are helping avoid a growth gap as mining investment wanes. Fourth-quarter gross domestic product advanced a faster-than-expected 0.8 percent from the previous three months as household spending and exports increased.
NAB’s expenses increased 11.6 percent due to foreign-exchange rates and U.K. conduct-related charges, the lender said. Total charges for bad debts fell 52 percent to A$528 million.
NAB announced a dividend of 99 cents a share. That compares with an A$1 mean estimate of six analysts surveyed by Bloomberg and 93 cents a year earlier.
The U.K. operations have weighed on the bank with mounting bad debts in 2012 triggering the first drop in full-year earnings that year since 2009.
U.K. banking cash profit rose to 73 million pounds ($124 million) from 33 million pounds a year earlier. So-called conduct-related costs in the country, which include charges for mis-selling some payment-protection insurance products, totaled 128 million pounds in the first half. The lender infused a further A$300 million in capital into the U.K. unit in March, it said in a filing today.
Common equity tier 1 capital, a measure of a bank’s ability to absorb future losses, was 8.64 percent under Australian Prudential Regulation Authority rules, the lender said. It targets a core tier 1 ratio of 8.75 percent to 9.25 percent from January 2016, it said in today’s statement.
ANZ (ANZ) posted an 11 percent increase in first-half cash profit while Westpac reported an 8 percent gain. Commonwealth Bank of Australia, the nation’s largest lender by market value, reports quarterly profit on May 14. CBA’s fiscal year ends in June, compared with September for its main competitors.
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