NAB 3rd quarter cash profit slips 3pc to $1.6bn

NAB’s cash profit for the June quarter is down to $1.6bn amid an increase in bad debts and rising funding costs.

Andrew Thorburn says higher funding costs are pressuring margins.

National Australia Bank has revealed a 3 per cent drop in profit in the wake of a considerable increase in souring loans and substantial margin pressure, amid rising funding costs.

NAB (NAB) today said its cash earnings for the June quarter were down 3 per cent year-on-year, falling to around $1.6 billion. The figures were also a 3 per cent slide on the earnings recorded for the three months through to March.

NAB shares reversed early losses to trade up 0.9 per cent to $27.21 at 11.45am (AEST).

The lender blamed the slip in profitability on a lower net interest margin — the key measure of profitability — with broadly steady revenues over the period unable to buoy overall group profit. NAB said higher funding costs were the cause for the pressure on its net interest margin. However, expenses were down 1 per cent over the period.

“While we saw higher funding costs during the quarter, asset quality remains strong and cost control was pleasing,” NAB chief executive Andrew Thorburn said. “These higher funding costs contributed to our decision to not pass on all of the most recent RBA interest rate cut to home loan borrowers,” he said.

The major lenders all withheld around half of the Reserve Bank of Australia’s interest rate cut in August, prompting fierce criticism, a move which the bank chief have had to defend.

“The decision reflects the responsibility we have to balance the needs of all stakeholders — borrowers, depositors and our 584,000 shareholders,” Mr Thorburn said.

NAB, which is the last of the big four banks to open its accounts for the three months through to June, also revealed a substantial increase in bad and doubtful debts, rising 21 per cent to $228 million.

The accounts of Commonwealth Bank, Westpac and ANZ last week all showed an increase in souring loans, mainly caused by exposures to loans in regions affected by the resources downturn in relating to the stressed dairy sector.

NAB said the hefty jump in bad debts reflected an “unusually low” bad debt charge in the first quarter of the year, along with extra provisions for mining and agricultural loan provisions. The ratio of loans more than 90 days overdue and gross impaired loans reached 0.81 per cent of all loans, up from 0.78 per cent at the end of March.

Last week the other major lenders revealed similar strains in the lending market as bad debts pick up as the good times come to a close. Westpac assured shareholders that its overall asset quality metrics remained near “cyclical lows” with impaired assets down $52m and no new impaired exposures worth more than $20m emerging during the quarter to June 30.

But while the lender’s overall bad debt charge was below the $333m first-half quarterly average, stressed assets rose to 12 basis points of total committed exposures as more customers in mining-exposed states fell behind on their mortgages. The bank’s “watchlist and substandard assets” rose $1.4bn due to increasing stress in mining-related regions for business bank customers and New Zealand dairy clients.

ANZ last week said its impaired assets were up 1.9 per cent to $3.1 billion over the quarter, with 90-day delinquencies increasing across both home loans and credit cards.

In unveiling its $9.45bn profit last week, CBA revealed a 27 per cent increase in bad loan costs over the year.