National Australia Bank first-quarter earnings climb 8pc to $1.7b

National Australia Bank said its margins had improved and its bad debts were lower, as it reported cash earnings for the December quarter of $1.7 billion, up 8 per cent on the previous period and in line with the market's expectations. NAB shares are trading higher on Tuesday morning. 

Underlying revenue rose 4 per cent on higher lending volumes, a higher net interest margin and strong performance in the wealth division, the bank said in a first-quarter trading update. NAB reported negative "jaws": its expenses rose about 5 per cent on higher staff costs. But it said expense growth for the full 2016 year would be less than the 4.1 per cent it reported in FY15. 

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With jittery bank investors focused on margins as financial market volatility pushes funding costs higher, NAB said its group net interest margin (NIM) had expanded - a result of the out-of-cycle interest rate rises last year. This was offset by higher funding costs and competition for business lending, NAB said, adding the rate of margin decline in the business bank is moderating. 

NAB shares opened higher; they had risen by 0.8 per cent to $24.95 at 10:25am AEST, the best performer of the major banks. 

Ross Kent will start at National Australia Bank on May 2.
Ross Kent will start at National Australia Bank on May 2.  

NAB reported a small increase in impaired loans because of exposure to the dairy industry in New Zealand but said overall its charge for bad and doubtful debts for the quarter fell 52 per cent to $84 million. This was better than the market was expecting. 

This very low level of bad debts has helped NAB generate its strong earnings and analysts suggest bad debts will inevitably tick-up in future periods, which would depress profit. "This sharp reduction in bad debts is not sustainable," said Omkar Joshi, an investment analyst at Watermark Funds Management. 

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The Australian banking division recorded improved revenue growth on higher volumes and stronger margins, and improved pre-provision profit, chief executive Andrew Thorburn said in a statement. 

"While competition in business banking remains intense and funding costs have risen, we have a strong franchise and pleasingly the rate of business lending margin decline is moderating." 

"Importantly, our asset quality and balance sheet remain strong, notwithstanding recent volatility in markets and commodity prices. Staying focused on these basics of banking is a priority for us."

NAB's solid result for the first quarter comes after Commonwealth Bank of Australia last week reported a strong interim profit also helped by very low levels of bad debts and revenue growth in the retail bank. 

Clydesdale loss will reduce capital 

NAB said it expected to make a loss of around $4.2 billion after its demerger and initial public offering of Clydesdale Bank in the UK. The loss will not be reported in its first half earnings and will not impact on the dividend policy, NAB said. 

After the demerger and IPO, NAB said its common equity tier 1 capital ratio would fall by 49 basis points to 9.6 per cent, above its target range of 8.75 per cent to 9.25 per cent. 

NAB said that while the inclusion of "a small number of New Zealand dairy exposures" totalling $NZ420 million as impaired assets had pushed up its ratio of "90+ days past due and gross impaired assets to gross loans and acceptances" to 0.68 per cent at the end of December, up from 0.63 per cent at the end of September, no losses on these exposures were currently expected. 

The 52 per cent fall in the charge for bad and doubtful debts reflected improved asset quality in Australian banking and also the non-repeat an overlay for Australian mining and agriculture exposures made in the last half. 

Mr Thorburn said NAB was "making good progress" finalising the sale of 80 per cent of its life insurance business to Nippon Life of Japan. 

After last week's savage declines, banks in Europe rose by 3 per cent on Monday, after Australia's big banks traded stronger. Analysts were disappointed, however, with Bendigo and Adelaide Bank, which reported a slightly lower margin

NAB shares were stronger on Tuesday morning after gaining 2.5 per cent on Monday, but are still down around 10 per cent from their levels earlier in February after bank stocks in Australia were dragged down by global concerns about bank exposures to China and the resources industry.