Thumbs up from investors for the National Australia Bank’s full-year results, despite the slide in earnings and lower dividend.
NAB shares climbed 3.2% to $19.31. That was despite a 10.7% rise in costs for the year which would normally be a big worry for investors and analysts.
For the year to September, NAB reported a 36.6% decline in cash earnings to $3.710 billion.
The fall flowed from a number of previously announced notable items, including higher impairment charges Excluding these items, the bank’s cash earnings would have been down 25.9% to $4.733 billion.
Thanks to its massive $3.75 billion fundraising earlier this year NAB’s group common equity tier 1 (CET1) ratio stood at 11.47%, up 109 basis points from September 2019. The regulatory minimum is 10.5% and normally silly analysts would be moaning about the NAB holding too much (expensive) capital.
But with all the uncertainty associated with the pandemic and its impact on personal and business finances and loans in the next year or so, a fat capital buffer provides considerable reassurance for shareholders and regulators.
NAB reported a 1 basis point reduction in its net interest margin (NIM) to 1.77% for the year due to its Markets & Treasury businesses, which felt the impact of holding higher liquid assets.
Excluding this, its net interest margin was flat, with the benefits of home loan repricing and lower wholesale funding costs offset by impacts of the low interest rate environment (thanks to the RBA rate cut to 0.25% in March. The cut this week to 0.10% will show up in the current first half of 2020-21.
NAB CEO Ross McEwan said the recent rate cuts by the Reserve Bank would place downward pressure on NAB’s revenue due to an expected reduction in interest income from loans.
“Our operating environment is evolving through the ongoing challenges and uncertainties associated with COVID-19,” Mr McEwan said.
But he added that stimulus packages were supporting the economic recovery.
“While economic activity has been materially impacted, the significant stimulus for households and businesses provided in the federal budget, combined with an expected more complete reopening of domestic state borders, provide a bridge to economic recovery as support is reduced,” Mr McEwan said.
Credit impairment charges of $2.76 billion have also dragged down the bank’s performance. It has also set aside $1.86 billion in provisions relating to the pandemic. Some $388 million for customers working in the hardest hit industries including aviation, tourism, hospitality, retail and commercial property.
The 10.7% rise in the NAB’s primarily related to costs associated with its operational overhaul strategy as well as added costs to help its workplaces maintain COVID-19 safety and security.
The NAB offered employees a 3 per cent pay rise and had to plough capital into adapting its workforce to remote working.
“Over time, we’ve got to get the costs down,” Mr McEwan said. It’s a plea all bank leaders have been making, but it is also a bit of a false argument because the COVID-19 pandemic has disrupted every businesses cost base and no one knows where it will settle.
“We’re in an industry that’s had a pretty good run for 30 years and it takes a bit to learn to get the muscle back of, ‘how do you quietly reduce costs?’ And the costs that don’t make any difference to customers. It’s a work in progress.”
