National Australia Bank Cash Profit Rises 6.5%

  • First-half cash profit increases 6.5% to A$3.31 billion
  • Net interest margin rises for the first time since 2011

National Australia Bank Ltd. posted a 6.5 percent increase in first-half cash profit as it bucked a trend among Australia’s largest lenders by decreasing bad-debt charges and as margins improved for the first time since 2011.

Cash profit, which excludes one-time items, was A$3.31 billion ($2.5 billion) in the six months ended March 31, compared with A$3.1 billion a year earlier, the Melbourne-based lender said in a statement Thursday. Taking into account the spinoff of its U.K. business, the bank made a net loss of A$1.74 billion.

National Australia decreased charges for bad and doubtful debts just as the turn in the commodities cycle leads to corporate defaults. The lender’s total charge for soured loans was down 6 percent from a year earlier, it said.

“The operating performance is in line with expectations, the margin increase was positive but the lower bad-debt charges will face scrutiny,” Brett Le Mesurier, a Sydney-based analyst at APP Securities Pty, said by phone. “National Australia’s impairment charge was a fraction of Westpac’s with a similar corporate loan exposure. You must say they are expecting the best outcome from these loans.”

National Australia’s shares climbed 2.1 percent to A$27.86 as of 10:14 a.m. in Sydney. That cut losses for the year to 4.7 percent compared with a 0.5 percent decline for the benchmark S&P/ASX 200 Index.

Corporate Defaults

National Australia set aside A$375 million for sour loans in the six months ended March 31, compared with A$667 million for Westpac Banking Corp. and A$918 million for  Australia & New Zealand Banking Group Ltd. The measure climbed to the highest in six years for ANZ and Westpac, according to their filings. National Australia managed to keep charges low by classifying A$522 million of impaired loans to the New Zealand dairy sector as no loss based on the security it held.

“Leaving aside specific provisions, the quality of the overall book is very strong,”Chief Executive Officer Andrew Thorburn told a media conference. “When you have an economy in transition, you are going to face some stress accounts. We have to work with them and that transition is already occurring.” National Australia is staring at four corporate stressed loans, it didn’t identify, which are carrying a 50 percent provision, he said.

A possible increase in corporate defaults and mortgage delinquencies, particularly in the mining states of Queensland and Western Australia are shaping up to be the next challenge for National Australia. The lender exited most of its overseas businesses including in the U.S. and the U.K. in the past year and sold a majority stake in its underperforming life-insurance unit to focus on Australian and New Zealand lending.

The lender’s Australian banking cash profit climbed 5 percent to A$2.69 billion, the New Zealand unit’s earnings dropped 3.3 percent, while profit at the wealth management division rose 11.7 percent, it said.

Improved Margin

The bank kept its interim dividend unchanged at 99 Australian cents.

Its common equity Tier 1 capital ratio, a measure of its ability to absorb future losses, stood at 9.7 percent as of March 31, compared with 10.1 percent three months earlier, it said. Australia’s largest lenders raised a record A$20 billion in equity capital last year to meet regulation aimed at bolstering their defenses against a housing downturn. They may need to raise more, with the Australian Prudential Regulation Authority saying last month that capital levels would be clear by the end of the year.

National Australia said it is considering issuing additional Tier 1 capital.

The net interest margin, the spread between interest the bank earns on loans and its cost of funds, rose for the first time since 2011, to 1.93 percent from 1.88 percent in September. National Australia cut its benchmark variable mortgage rate by 25 basis points Tuesday, passing on in full the central bank reduction. Thorburn said he expects ongoing margin pressure emanating from lending competition and increased funding cost.

National Australia’s results follow ANZ and Westpac earlier this week, with both lenders posting lower-than-expected earnings. Commonwealth Bank of Australia, which follows a June fiscal year compared with September for its three competitors, issues quarterly earnings on Monday.

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