NAB steadies the ship as core strengthens

NAB chief Andrew Thorburn has stood by the lender’s provisioning to hold the bank’s dividend steady.

Andrew Thorburn announces NAB’s half-year results in Sydney yesterday. Picture: Paul Miller

National Australia Bank chief Andrew Thorburn has stood by the lender’s provisioning, amid fears stressed corporate exposures and dairy farmers had been underprovided for, to hold the dividend steady, taking the shine off improving core operations.

As investors welcomed NAB’s first result free of troublesome subsidiaries and divisions, Mr Thorburn came under pressure around the outlook for loan losses for the new-look bank that handed down a notably lower charge than rivals ANZ and Westpac.

“With the specifics we’re got, knowing the positions we’ve got, going through as we normally do in a very disciplined way … we feel we’ve made adequate provisions,” Mr Thorburn said, seeking to address concerns that the bank’s dividend was being propped up.

After selling British lender Clydesdale and most of its life insurance arm less than two years into the job, Mr Thorburn said the bank’s sector-leading bad debt charge was “one of the dividends” of the “derisking” done in recent years.

He added that the turnaround of the biggest division, the business bank, was progressing well and starting to bear fruit as margins stabilised, a claim backed by analysts.

As expected following the costly sale of Clydesdale in February, NAB sank to a $1.74 billion loss for the six months to March 31. It included a $4.2bn loss from the Clydesdale deal and an $801 million hit from previous misconduct by the British lender, albeit covered by a €1.7bn ($2.6bn) indemnity deed NAB has in place to shield shareholders from future payouts.

NAB’s cash profit, which funds dividends and provides an underlying view of performance, grew 6.5 per cent to $3.3bn on the back of stronger margins and lower bad debts. After ANZ earlier this week cut its dividend, NAB maintained the payout at 99c fully franked, payable on July 5, pushing the bank’s payout ratio up to 78.8 per cent — above the target range of 70-75 per cent.

While NAB’s bad debts fell over the year to $375m, the charge rose 7.4 per cent on six months ago due to four large uncertain “single name exposures” plus higher “collective provision ­charges” for some New Zealand dairy farmers battling lower milk prices.

The charge equated to just 14 basis point of loans, in contrast to ANZ’s spike to 32 basis points and Westpac’s rise to 21 basis points, both of which also related to troubled exposures afflicting all the major lenders including Arrium, Slater & Gordon, Peabody Coal, McAleese and Dick Smith.

UBS analyst Jonathan Mott said NAB’s charge looked “undercooked” in order to “pay the ­dividend”, noting that new impaired assets had more than doubled to almost $1.3bn.

After rising as much as 4.1 per cent, NAB shares cooled to finish 2 per cent higher at $27.84.

Part of the new impaired assets were $522m of NZ dairy farmers. But unlike the four uncertain corporate loans worth $358m that are 50 per cent covered, NAB did not add specific provisions for the new impaired NZ exposures in a move investors claimed helped keep the group bad debt charge low.

While conceding it was an “unusual circumstance”, Mr Thorburn said the dairy exposures were well secured and NAB had not provided for them because no losses were expected.

Although declining to name NAB’s four problem clients, Mr Thorburn added that the group’s collective provision was sector leading at $3bn, and all the banks had different exposures and security concerning the corporate loans.

Mr Thorborn said the credit outlook was heavily tied to the economy and despite “some signs of stress”, the fact a difficult transition was occurring without a recession was “a tribute to the underlying strength”.

“The environment is difficult, who knows what stress is going to unfold, but given the collective provision we’ve got, our capital position and our general asset quality we feel OK,” he told The Australian. “We’re certainly not complacent but we feel we’re in as good a position as we’d want to be given what’s ahead.”

But he conceded a major downturn in credit conditions would force the bank to review its dividend policy.

“We can see a path back into the (dividend payout) range,” he said. “Clearly if there was a shock event or material change we would obviously keep reviewing it but when you’ve got 584,000 shareholders who are normal folk, that dividend is important.”

Matthew Davison, an analyst at fund manager Martin Currie, said only time would reveal whether NAB’s apparent optimistic view of credit conditions would play out.

“The result provided some comfort on momentum in the business bank and NAB appears more optimistic on losses from new problem loans than the market expected,” Mr Currie said.

“How this plays out may influence the current debate about the sustainability of dividends.”

A highlight of the result was NAB’s net interest margin rising five basis points half-on-half to 1.93 per cent following the lifting of mortgage and business lending rates, partly offset by higher wholesale funding costs and competition. The bank’s return on ­equity eased to 14.1 per cent, down 20 basis points.