Despite weaker revenues, the National Australia Bank (NAB) today joined peer banks ANZ and Commonwealth (CBA) in reporting broadly satisfactory figures with a 7% rise in unaudited cash earnings for the three months to June 30 to $1.7 billion.
Lower expenses, especially for bad and doubtful debts in Australia and the UK, helped more than offset a small fall in revenues for the quarter.
The bank said the result was "around 2% above the quarterly average of the March 2014 half year result" of $4.75 billion. The June quarter figure takes the unaudited nine month result to $4.75 billion.
On a statutory basis, unaudited net profit attributable to the owners of the Company for the June quarter was approximately $1.7 billion, the bank said.
And like the ANZ and CBA, the NAB’s report and commentary revealed a few points of worry for the banks generally and their investors.
"Revenue decreased by approximately 1% due mainly to lower markets income as subdued volatility reduced trading opportunities," NAB said.
"This was partially offset by higher lending balances and a broadly stable customer margin.
"Expenses fell 6%, but were flat after excluding the impact of UK customer conduct costs in the March 2014 Half Year."
"The charge for bad and doubtful debts for the quarter was $241 million, down 9% due primarily to lower charges in Australian Banking and UK Banking.
"For the financial year to date, the Group has raised approximately $23 billion of term wholesale funding. The weighted average term to maturity of the funds raised by the Group for the financial year to date was 5.1 years," the NAB said in today’s statement.
NAB vs CBA vs WBC vs ANZ 5Y – NAB satisfactory, joins peers with cautious outlook
New CEO, Andrew Thorburn said in this morning’s statement that; "The Group achieved a satisfactory third quarter result. Costs were well contained and asset quality continues to improve. While revenue growth remains challenging, Australian home lending continues to achieve market share gains and Australian business loan growth improved in what is traditionally a stronger quarter".
"At the end of July this year we announced the sale of £625 million of UK commercial real estate loans. This was a pleasing result, and as we have previously said we will continue to look at opportunities to optimise return on equity by accelerating the sale of non-core assets," the bank said today.
"However, our UK operations still face a number of challenges. Conduct charges are difficult to predict, but we now expect that we will need to take further provisions at the Full Year result for both interest rate hedging products and Payment Protection Insurance (PPI).
"In addition, the Scottish Independence vote takes place on 18 September and a vote in favour of independence may give rise to significant additional costs and risks for Clydesdale Bank. We continue to closely monitor the situation and have appropriate contingency planning in place.
“Like all large businesses there are things we can do better at NAB and we will have more to say on this at our Full Year result on 30 October,” he said.
"Australian Banking cash earnings were broadly flat over the quarter with lower markets income offsetting continued good growth in mortgage lending and further falls in B&DD charges. Over the quarter home loan balances grew at an annualised rate of 8.5%.
"NAB Wealth cash earnings increased over the quarter benefiting from improved insurance claims results while lapses remained stable and the impact of higher FUM was offset by a mix change to lower margin wholesale investment business in the period.
"NZ Banking local currency cash earnings rose over the quarter due to higher revenue from increased loan volumes and lower funding costs. Expenses were well managed while B&DD charges were stable.
"UK Banking local currency cash earnings were lower in the quarter. Continued strong growth in the mortgage book and a lower charge for B&DDs was offset by a lower net interest margin largely reflecting timing of the Financial Services Compensation Scheme (FSCS) levy," the bank said in this morning’s statement.
And buried in the NAB report this morning was bad further news for the full year result – hundreds of millions of dollars of losses in the UK business because of misselling of financial products.
CEO Thorburn said the bank will make additional provisions at the full-year result for past misconduct issues in the United Kingdom, which continue to plague all UK banks. (The total cost has been in the tens of billions of dollars for the sector as a whole)
In today’s statement, Mr Thorburn said misconduct financial charges in the UK were “difficult to predict” but "we now expect that we will need to take further provisions" for cases involving interest rate hedging products and payment protection insurance (PPI).
NAB said an additional provision of "at least £170 million ($305 million)" will be required at full-year result in relation to interest rate hedging products.
"At least £75 million” would be required at the full-year relating to "increased costs of administering the PPI remediation program" and in relation to increased costs of administering the PPI remediation program.
“Significant additional provisions for PPI redress are also likely to be required” at the full year result in relation to new developments, NAB said including: “the implementation of a new complaints handling process, which is likely to lead to increased payments both for new complaints and in revisiting closed complaints; the need to extend our examination of historical records dating back to pre-2000 periods, including unindexed microfiche records; higher than expected levels of new complaints; and the fact that Clydesdale Bank is subject to an enforcement process with the Financial Conduct Authority (FCA) in relation to its previous PPI complaints handling processes, the outcome of which is not yet known. The ability to reliably estimate the impact of these developments remains uncertain.”
"There remains a wide range of uncertain factors relevant to determining the total costs associated with conduct related matters," the bank warned.
In other words, more red ink in the UK, and a big whack to the net profit of around $6.2 billion, on a cash basis, if the bank earns $1.7 billion in the 4th quarter.
