NAB First-Half Cash Profit Up 3.1% on Home Lending, Trading

National Australia Bank Ltd., the country’s largest lender by assets, boosted first-half cash profit by 3.1 percent on higher earnings from mortgage lending and trading, partly offset by U.K. losses.

Cash profit, which excludes one-time items, climbed to A$2.92 billion ($2.97 billion) in the six months ended March 31 from A$2.83 billion a year earlier, the Melbourne-based lender said in a statement today. Analysts estimated earnings on that basis of A$2.89 billion. Net income for the period increased 23 percent to A$2.52 billion.

Chief Executive Officer Cameron Clyne is seeking a bigger share of Australia’s mortgage lending, which is growing at its slowest pace ever. Clyne plans to shed A$800 million in costs over five years as the bank simplifies products and invests in new technology after paring U.K. operations, where mounting bad debts last year triggered the first profit drop since 2009. Australia and New Zealand Banking Group Ltd. and Westpac Banking Corp. last week reported a 10 percent rise in cash profit.

“The NAB results were expected to be solid and it has managed to deliver this,” said Evan Lucas, market strategist at IG Markets Ltd. “However, considering market expectations after stellar results from ANZ and Westpac, this might be taken as a disappointment.”

NAB shares closed 2.1 percent lower at A$32.68 in Sydney, trimming gains for the year to 31 percent. NAB is the best performer among the top four Australian banks. The benchmark S&P/ASX 200 index was flat.

U.K. Economy

NAB’s U.K. commercial real estate business, which was separated from its U.K. unit in October in a bid to gradually close it, made a cash loss of 149 million pounds ($231.5 million), the bank said. The value of the portfolio fell to 5 billion pounds at March 31 from 5.6 billion pounds in October.

Clyne said the U.K. unit’s fortune was dependent on the economy, which is limping out of its longest peacetime slump in almost a century. NAB did not rule out the sale of the commercial real estate portfolio.

“We have set it up in a data room type environment. So if some one is interested they can come along and get it done quite quickly,” Mark Joiner, chief financial officer, told an analyst conference. “We certainly are not interested in people who want to bottom feed. There could be people interested in taking the good stuff at book value.”

NAB’s business banking profit fell 1.9 percent in the half from a year earlier as slowing Australian economic growth curbed credit demand. The division holds a market-leading 25 percent share of Australia’s corporate lending.

Trading Income

Personal banking income rose 19 percent due to strong growth in home lending. NAB’s mortgage market share rose to 15.2 percent at the end of March from 14.6 percent a year earlier. Clyne expects NAB’s pace of market share growth for mortgages to slow, he told Bloomberg in April.

Trading income, largely from its wholesale banking unit, doubled to A$604 million, the lender said.

“The biggest positive is there weren’t any negative surprises and while the U.K. business hasn’t completely turned around it hasn’t deteriorated any further,” said Simon Burge, chief investment officer at Above the Index Asset Management Pty Ltd, which owns NAB shares.

Net Income

First-half net income rose from A$2.05 billion a year earlier when it booked $776 million in non-cash charges including impairments related to the U.K. operations.

The U.K. banking unit’s restructure is ahead of schedule, Clyne said. His plan to close the business in the south of the country and reduce exposure to real estate exposure were ahead of initial plans. NAB has also reduced its U.K. staff to 1,100 from 1,400, he said.

NAB’s Australian and New Zealand banking units performed well even as economic activity decelerated. Australia’s economic growth is set to fall to 2.5 percent this year, according to a February central bank forecast. Home lending in Australia grew 4.4 percent in March from a year earlier, the slowest pace since records began, according to central bank data.

The cost-to-income ratio for the bank fell 10 basis points from a year earlier to 41.7 percent and its headcount dropped by 731 to 42,668.

Lower Margin

The net interest margin, a measure of the bank’s lending profitability, narrowed 14 basis points to 2.03 percent. The country’s lenders since November 2011 have held back a portion of central bank rate reductions to help preserve margins, citing high wholesale funding costs and increased competition for deposits.

Three of Australia’s four major lenders, including NAB, on May 7 passed on in full the central bank’s interest-rate cut for the first time in 17 months, sending benchmark home-loan costs to the lowest since 2009.

NAB set aside A$1.09 billion for bad debts, down 3.5 percent from a year earlier.

Common equity tier 1 capital, a measure of a bank’s ability to absorb future losses, was 8.22 percent. It announced a dividend of 93 cents, up 3 cents from a year earlier.

Westpac said last week it would pay a special dividend for the first time since 1988. Commonwealth Bank of Australia, the country’s largest lender by market value, reports third-quarter earnings on May 15.

PricewaterhouseCoopers LLP said that Australia’s four major banks delivered combined underlying cash earnings of A$13.4 billion for the first half, up 7.3 percent from the previous period.

Australian banks’ “tight cost management, a focus on productivity and low bad debt expenses overcame the Australian economy’s weak credit growth to deliver the record result,” Stuart Scoular, PricewaterhouseCoopers Australia banking leader, said in a statement.

(Updates with share closing in fifth paragraph.)
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