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NAB's 1Q cash profit dips 1pc after costs rise

Nicholas Grove  |  06 Feb 2017Text size  Decrease  Increase  |  

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National Australia Bank reports a 1 per cent fall in first-quarter cash profit to $1.6bn after expense growth relating to salary increases and redundancies outstrips revenue growth.


National Australia Bank (ASX: NAB) on Monday announced a first-quarter underlying cash profit of $1.6 billion, down 1 per cent on the same quarter in the previous financial year, after an increase in redundancy costs impacted the bottom line.

Group net interest margin (NIM)--the difference between interest income generated by the bank and the amount of interest paid out to lenders, relative to the amount of interest-earning assets--was broadly stable.

Revenue increased approximately 1 per cent year over year, benefitting from growth in lending and higher trading income, NAB said in a statement to the ASX.

However, expenses for the quarter rose approximately 5 per cent, which NAB attributed to higher personnel costs mainly related to the timing of salary increases and redundancies, combined with higher project-related costs.

These items were partly offset by productivity savings, the bank said.

NAB said its charge for bad debts improved, falling 23 per cent to $164 million after there were provisions for mining, mining-related and agricultural sectors made in the September 2016 half year.

The bank said its common equity Tier 1 (CET1) ratio was 9.5 per cent at 31 December 2016, compared with 9.8 per cent at 30 September 2016, reflecting the impact of the final 2016 dividend declaration.

However, the bank said its CET1 target ratio remains 8.75 per cent to 9.25 per cent, based on current regulatory requirements.

NAB also said that in order to maintain its strong capital position it is considering the issue of a new ASX-listed subordinated Tier 2 capital security.

While describing NAB's first-quarter result as a "bit soft," Morningstar head of Australian banking research David Ellis said he was leaving his full-year $6.7-billion cash profit forecast unchanged, and was maintaining his positive view on the bank.

"Our positive view is predicated on Australia's biggest business bank leveraging the expected increase in business lending," Ellis said.

"We like the ramp up in investment in its profitable Australian and New Zealand banking franchises following years of painful restructuring of its underperforming international assets.

"Disposing of legacy assets, focusing on higher-return business, improving operational efficiency, tightening loan underwriting standards, and boosting retail customer satisfaction levels underpin the earnings outlook."

Ellis said NAB continues to deliver best-in-peer group loan-loss rates and he is increasingly confident fiscal 2017 will be no different.

"Looking ahead we expect impressive loan quality to partially compensate for slower revenue growth."

NAB Group CEO Andrew Thorburn said the bank will continue to target "positive jaws" (revenue growth outstripping cost growth), with the bank "well advanced on a number of initiatives that give us confidence about second-half productivity and cost benefits".

"While the Australian and New Zealand economies remain resilient and continue to deliver solid growth, the operating environment has some challenges, with funding costs remaining elevated and competition still intense," Thorburn said.

"We remain focused on executing against our strategic priorities to ensure we can grow in a sustainable way while managing our business responsibly for all stakeholders."

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Nicholas Grove is a Morningstar journalist.

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