A sigh of relief was heard around the markets yesterday as both Macquarie Group (see below) and the National Australia Bank revealed slightly better than forecast trading updates.
While Macquarie shares eased, they weren’t sold off as sharply as they have been in the past after unhappy updates, while the NAB saw its shares enjoy a solid day’s trading to end at a three month high.
NAB shares finished up 48c at $25.48 at the close, a rise of 1.9%. They were up over 2% at one stage.
The two updates mean the market is now positively primed for today’s interim profit announcement from the Commonwealth Bank.
But the reality of the two updates is that the banks face flat times this year and next.
In fact, despite yesterday’s upbeat commentaries from the respective CEOs, the Australian banking system is going up and down on the spot, depending mostly on lower bad debt charges for earnings growth.
It’s hard to see where growth greater than the growth in the economy will come from, especially with business lending still sluggish.
The banks are still all looking to lend more to business in the next year or two after seeing home lending peak and then slide.
But growth is very sluggish and looks remaining that way for much of this year.
The NAB yesterday reported $1.3 billion in unaudited cash profits for the three months to December 31 2010, which was just above market forecasts of $1.25 billion.
That’s $200 million more than the $1.1 billion of 12 months ago and slightly higher than the $1.29 billion for the last quarter of its previous year.
And that was accounted for by a near quarter of a billion drop in bad debt charges.
NAB’s charge for bad debts was $493 million in the three months to December, which it said included a $25 million overlay relating to floods in central Queensland during December.
"The overlay will be revised as we further assess the impact of this and subsequent natural disasters in Eastern Australia," NAB said.
NAB reported bad debt charges of $739 million in the previous corresponding period.
That fall of $246 million was very helpful in lifting earnings for the quarter.
Without it the NAB’s profit would have been line ball with a year ago.
The bank said cash earnings were driven by improved revenue from its Australian banking operations and that lower charge for bad and doubtful debts (which will be a feature of the CBA result).
NAB said its group margin was slightly lower than the second half of the 2010 financial year, with repricing for current market conditions offset by higher funding costs and strong mortgage volume growth.
"Business banking and personal banking were key drivers of Group revenue during the first quarter," chief executive Cameron Clyne said in the statement.
NAB continued to gain market share in business banking "in what remains a subdued business credit environment", he said.
Momentum remained strong in mortgages and transaction accounts (that’s personal banking), while income from wholesale banking markets improved in the first quarter despite challenging market conditions, he added.
NAB said it has raised about $12.6 billion in unsecured term wholesale funding in the financial year to date, with its target for the full year between $25 billion and $30 billion.
Its Tier 1 capital ratio increased from 8.91% to 8.96% in the three months to December 31.
Commenting on NAB’s wealth management business, MLC and NAB Wealth, Mr Clyne said financial market conditions had improved.
"MLC & NAB Wealth has benefited from the improvement in financial markets over the quarter and continued integration benefits flowing from the Aviva acquisition. This has been offset to some extent by higher disability claims.
"Despite subdued economic conditions, New Zealand Banking improved earnings and maintained its track record as a consistent, tightly managed business. At the same time, United Kingdom Banking remained sound and resilient, operating within a difficult economic environment," he said.
