NAB holds dividend steady to prove doubters wrong

NAB chief executive Andrew Thorburn has stared down doubters to hold dividend steady.

NAB chief executive Andrew Thorburn. Picture: Stephen Cooper

National Australia Bank chief Andrew Thorburn has labelled as “justifiable” the decision to hold its dividend steady, staring down doubters who predicted a cut as he preserved capital by shunning $22 billion of low-returning institutional loans in favour of more profitable mortgages.

Kicking off the major banks’ results season, NAB yesterday held its final dividend flat at 99c, payable December 13, as second- half cash profit — which funds dividends — rose 1.3 per cent to $3.3bn. This took full-year dividend to $1.98 a share, also flat on last year.

Annual cash profit for the year to September 30 was up 4.2 per cent to $6.5bn, ahead of expectations, as NAB basked in a relatively low rate of soured loans and tight cost control. Combined, this offset soft revenue growth.

After a historic year where poorly performing subsidiaries, British lender Clydesdale Bank and the life insurance business, were offloaded at heavy losses, NAB’s net profit suffered with a 94 per cent dive to $352 million.

Investors, however, warmed to Mr Thorburn’s progress in stabilising business lending margins and his claim that NAB’s return on equity of 14.3 per cent had closed the gap with major bank rivals.

Mr Thorburn also set a new goal of achieving “positive jaws” — where revenue growth outpaces expense growth — along with pledges to lead rivals in total shareholder returns and return on equity.

“I expect that all parts of our business are (going to be) under real pressure,” Mr Thorburn said after NAB’s net interest margin eased 2 basis points to 1.88 per cent from higher funding costs and fierce lending competition.

“What we have to do is apply capital to the ones that we really believe are going to give us a good return, deepen the relationships with clients ... and go back to the productivity piece.”

While some analysts flagged that NAB’s dividend could be as low as 79c, Mr Thorburn, who also sits on the board, claimed the bank wouldn’t “jump the gun” ahead of certainty on regulatory changes and the bank was confident in its dividend based on capital levels, earnings and growth trajectory.

He said any increases in capital requirements from looming global rule changes known as “Basel IV” and the implementation of the domestic Murray inquiry would be assessed “at the next half as to what that means if anything in terms of the dividend”.

“The whole Basel IV environment has been very unclear with international regulators and the Europeans and Americans having very different views about what should happen ... how big (capital changes) are going to be and how long we will get to transition,” he told The Australian.

“If it happens we will look at it at the time, but when you have a CET1 (common equity tier-one ratio) of 9.77 per cent, it’s an excellent place to start from.”

NAB shares initially jumped before easing to end 13c higher at $27.59 while rival banks closed in the red.

Despite NAB’s efforts yesterday, fears about dividend sustainability remain after ANZ cut its interim payout and Commonwealth Bank, the nation’s most profitable lender, in August held its annual payment steady for the first time since the global financial crisis.

While applauding NAB’s cost reductions and capital levels, UBS analyst Jonathan Mott said NAB’s flat second-half revenue growth was concerning and dividend sustainability “remained questionable”.

Watermark Funds Management’s Omkar Joshi agreed, noting banks could only limit asset growth for so long and any acceleration would put pressure on the dividend.

As the proportion of profits paid to shareholders rose to 80.8 per cent, Mr Thorburn argued the targeted dividend payout ratio of 70-75 per cent was set when returns and risk-weighted asset growth were different, noting that the balance sheet wasn’t expanding rapidly.

NAB revealed $5.8bn of loans generating single digit returns on equity had been run off in the past year while $16bn of lending opportunities were shunned. The strategy mirrors that of ANZ, which has been rewarded by investors for shedding low-returning loans to institutional clients, such as larger corporations and government entities.

The move reduced NAB’s underlying RWA growth to just 1.3 per cent — limiting the capital required for lending — and Mr Thorburn said this may continue as more profitable and less capital intensive lending was prioritised.

He singled out mortgages, wealth and small and medium businesses.

Australian housing lending grew almost 15 times faster than business lending in the second half and Mr Thorburn said the bank had recently improved home loan growth to be in line with the broader system, a rate he aimed to retain.

More broadly, NAB’s annual bad debt charge rose 7 per cent to $800m amid a jump in small business losses.

The bank also realised $300m of new NZ dairy loans as being impaired and added $100m to its “collective provision overlay” to cover any flow on mortgage stress from the mining slowdown in regional towns.

Mr Thorburn also played down fears of settlement failures on inner city apartments in Sydney, Melbourne and Brisbane, saying NAB was not seeing any stress levels yet.

He said population growth was outpacing dwelling completions while low interest rates and low unemployment boded well for the property market.