NAB's UK operations are costing it dearly.

NAB's UK operations are costing it dearly. Photo: Bloomberg

FOR more than a decade National Australia Bank has underperformed its big four banking peers in terms of total returns on shareholder funds and return on equity. Its latest full-year results are unlikely to change any of that, particularly its second-half earnings.

The result offers up more disappointments, particularly from its UK business and to a lesser extent its business banking operations, which suffered a rise in bad and doubtful debts.

On the domestic front, its performance is not all that different from ANZ, as the cost of deposits increased, but the UK casts a cloud over the overall result.

In the year to September 30 the bank posted a 0.5 per cent fall in total cash earnings to $5.4 billion, but deteriorating rapidly in the second half - down 7.9 per cent - largely due to a blowout in bad and doubtful debts in its UK business and its business banking division. It also reflects the slowing Australian economy.

Its business banking division's cash earnings dipped 1.5 per cent over the year to $2.4 billion, largely due to an 11 per cent jump in bad and doubtful debts to $893 million for the full year.

NAB's total bad and doubtful debts rose 44 per cent to $2.6 billion, with $960 million coming from its UK banking business, which suffered a cash earnings loss of £139 million in the year to September 2012.

The bank's shares closed 9¢ lower at $25.79 on Wednesday. The stock is up 10.8 per cent since the beginning of the year, while Westpac has risen 27.1 per cent, ANZ is up 23.4 per cent and CBA 16.7 per cent.

If the economies of Europe and Australia continue to deteriorate, the expectation is that NAB's bad and doubtful debts will follow suit, which will weigh on the group's earnings.

The results will put added pressure on NAB chief Cameron Clyne, who has been in the top job for almost four years, after a meteoric rise, and who now finds the bank is going backwards.

To be fair, most of the problem lies in the UK and Clyne inherited the mess, but it is intensifying under his watch. The finger now needs to be firmly pointed at the board, which made the error of not extricating the bank from the UK a few years ago when it had the chance. Investors are paying a heavy price.

The UK has been an albatross around the bank's neck for years. The big hope is that when the UK economy eventually emerges from the mire it has found itself in, NAB will be in a position to sell its operations there.

These assets do not fit in with NAB in the longer term - and they never did.

They have always lacked scale, they have taken up a lot of management time and as conditions worsened in the UK in the past few years they became a bigger and bigger drag on the bank's earnings base and return on equity.