NAB fires starter’s gun on business investment boom after $3.34bn first half cash profit

The nation’s biggest business bank has foreshadowing ‘across-the-board’ wage increases if the Morrison government continues to support the economy.

NAB is the third major bank this week to hand down its half-year profit. Picture: Bianca De Marchi

The nation’s biggest business bank has fired the starter’s gun on a business investment boom, foreshadowing “across-the-board” wage increases if the Morrison Government continues to support the economy and helps unemployment to fall to about 4 per cent.

Rounding out the interim reporting season for the major banks, National Australia Bank announced a 35 per cent increase in cash profit before notable items to $3.3bn.

The NAB result contributed to the major-bank sector’s 62.3 per cent spike in combined half-year cash profit from continuing operations to $13.8bn, mainly due to a massive turnaround in soured loans due to the strong economic recovery from COVID-19.

Chief executive Ross McEwan forecast the unemployment rate would continue to fall to below 5 per cent and possibly to the “low 4’s” by the end of 2021, creating pressure on wages which would be widespread rather than confined to particular sectors.

“The economy is certainly recovering and it’s important not to put anything in its way, because it will help the government repair its revenues and its balance sheet over the long-term,” Mr McEwan told The Australian.

“I think we have the right level of stimulus now, and as long as the government continues to support the strong recovery we’ll be in very good shape for the next few years.”

An essential element of the formula, however, was to “get unemployment down but also wages up”.

This would be fed by an imminent but long-awaited wave of investment, with Mr McEwan saying business confidence levels were currently the highest on record.

The 6-12 month lag in actual investment was now drawing to a close, such that NAB was processing “more and more applications”.

“So at this point in time, don’t do anything to stall the recovery, because (it) certainty is starting,” the NAB chief said.

The result was notable for a number of reasons, not in the least because NAB broke with its customary practice of reporting large, one-off losses.

NAB CEO Ross McEwan: ‘The economy is certainly recovering and it’s important not to put anything in its way.’ Picture: Aaron Francis

It also benefited like the rest of the sector from a sharp turnaround in credit impairments, reporting a writeback of $128m compared to a $1.2bn charge a year ago.

The interim dividend was doubled to 60c.

NAB shares retreated 81c, or 3 per cent, to $26.56 against a weaker overall market.

Citi analyst Brendan Sproules said NAB had put in a solid post-COVID performance, with asset quality slightly better expected, a strong surplus in its common equity tier one ratio of 12.37 per cent, and “disciplined cost management”.

“Prospects for volume and revenue growth in the second half should differentiate NAB from its peers, but at 1.5 times book value we see the solid core earnings trajectory priced in,” Mr Sproules said.

Evans & Partners analyst Matthew Wilson said the result was possibly NAB’s cleanest in more than 20 years.

Mr McEwan said the rebound in the Australian and New Zealand economies was better than expected, making NAB optimistic about the future given the vaccine rollout and better health outcomes.

“But risks do remain,” he said.

“The recovery is not even, and some customers such as those in international travel and hospitality, particularly in CBD areas, still face significant challenges.

“Longer term outcomes for these customers depend on a number of factors expected to become clear in coming months.

“These include the impact of JobKeeper ending, timing of the vaccine rollout and the reopening of international borders.”

Leaving aside the huge turnaround in soured loans, NAB’s underlying profit declined 7.6 per cent compared to the second half of last year, as markets and treasury income normalised from elevated levels.

Revenue was also impacted by ultra-low interest rates and subdued asset growth.

Momentum, however, was building across NAB’s businesses.

“It (momentum) is certainly the friend of NAB right now – April was a good month for us, as was March,” Mr McEwan said.

Cash earnings for NAB’s largest division, the business and private bank, fell 10.3 per cent to $1.2bn for the March half-year, mainly due to less revenue from the low-rate environment and higher expenses to support customers affected by COVID-19.

However, volumes rebounded in March and were stronger again in April, leading to an improved market share in SME lending and a significant expansion in the pipeline of new business, up 50 per cent from a year ago.

In the personal bank, market share growth was expected to resume in the current half-year.

Mr McEwan said NAB had maintained “prudent” collective provisions equal to 1.5 per cent of credit risk-weighted assets.

The bank’s common equity tier one ratio finished the period at 12.37 per cent – higher than the target range of 10.75 per cent to 11.25 per cent.

The NAB boss said holding surplus capital was the right thing to do in the circumstances.

However, capital management moves to return the CET1 ratio to more normal levels would be considered in the medium term.

The bank is the third of the majors to hand down a bumper profit this week

On Wednesday, ANZ more than doubled its first-half cash profit to $2.98bn, while Westpac’s interim cash profit on Monday surged 256 per cent to $3.54bn.