NAB earnings jump 6.5pc in H1

NAB books a hefty accounting loss on its UK exit but maintains its interim dividend as its cash profit meets expectations.

Andrew Thorburn said the first result “squarely focused on our Australian and New Zealand business” was showing progress. Picture: AAP/Paul Miller.

National Australia Bank has managed to hold its dividend steady as first-half cash earnings beat expectations, sparing bruised shareholders fresh disappointment at the beginning of a new era following years of under-performance.

As expected following the costly sale of British subsidiary Clydesdale in February, NAB today posted a $1.74 billion loss for the six months to March 31.

It included a $4.2bn loss from the demerger and float of Clydesdale, plus a fresh $801 million charge for prior misconduct by the British lender which was covered by a €1.7bn conduct indemnity deed NAB previously put in place to cover potential future payouts.

But NAB’s cash profit, which funds dividends and provides a clearer underlying view of performance, grew 6.5 per cent to $3.3bn, just ahead of expectations.

After ANZ earlier this week cut its dividend, NAB maintained the payout at 99c fully franked payable on July 5, pushing the payout ratio up to 78.8 per cent -- above the target range of 70-75 per cent.

NAB chief Andrew Thorburn said the first result “squarely focused on our Australian and New Zealand business” was showing progress.

“It shows that delivering against our strategic priorities is producing results and laying the foundations for sustainable growth and returns,” he said.

“The decisions we have made over the last two years have resulted in NAB being a stronger and simpler business. We are focused on improving returns in our Australian and New Zealand businesses and, while there is still more work to do, we have made good progress against our agenda.”

Along with Clydesdale, Mr Thorburn has overseen the sale of US subsidiary Great Western Bank, a portfolio of soured British commercial real estate loans and most of its life insurance operations since becoming CEO almost two years ago.

NAB’s results come after ANZ and Westpac this week reported mixed results, including large increases in bad debts.

While NAB’s troubled loans fell compared to a year ago, the impairment charge of $375m was up 7.4 per cent on six months ago “relating to a small number of large single name exposures, combined with increased collective provision charges for NZ banking given the continued challenging outlook facing the dairy industry”.

Omkar Joshi, an analyst at Watermark Funds Management, said NAB’s bad debt charge of 14 basis points of loans was “exceptionally low” relative to rivals and below expectations.

“The low charge is surprising given it has similar large single name problem exposures to peers,” he said, referring to the major banks’ various exposures to troubled corporates like Arrium, Slater and Gordon, Peabody Coal, McAleese and Dick Smith.

“Impaired assets increased in the period with NAB classifying $522m of dairy exposures as impaired. It is important to note that NAB is assessing these impaired loans as no loss which has helped to keep the bad debt charge low.”

Deutsche Bank analyst Andrew Triggs added NAB’s dividend was hostage to bad debt charges “staying low”.

Mr Thorburn said: “Obviously there’s some pockets of stress,” he said. “Where you’re seeing the tick up is in the areas you’d expect in Western Australia and Queensland. The rest of the book is fairly stable.”

In early trade, NAB shares rose 2.5 per cent to $28.

A highlight of the result was NAB’s net interest margin rising 5 basis points half on half to 1.93 per cent following the hiking of mortgage and business lending rates, “partly offset by higher wholesale funding costs and competition for business lending”.

NAB is the nation’s biggest lender to businesses by assets and has been focused on halting market shares losses, which last year dragged on margins as the bank cut prices.

“In business banking, revenue growth over the year has been encouraging, up 2 per cent, with our investments in more bankers and enhanced tools and disciplines helping drive improved loan growth in our priority segments and higher margins over the March 2016 half year,” Mr Thorburn said.

Meanwhile, Speaking to the political pressure facing the banks at the moment, as Labor calls for a royal commission, Mr Thorburn said the banks have been around a long time, and that “markets come and go and politics come and go”.

“That environment is something that you have to keep adapting to,” he said. “We believe in what we’re doing for our customers.”

After passing on the Reserve Bank’s full cut to interest rates this week, Mr Thorburn said the bank may decide to react differently to rate cuts or increases in the future but the bank’s principles “would be the same”.

The group’s tier-one capital ratio came in at 9.7 per cent, down 55 basis points thanks to the UK demerger but still above its target ratio of 8.75 per cent and 9.25 per cent.

NAB added it is mulling the issuance of a new ASX-listed Tier 1 capital security.