By Eric Johnston
NATIONAL Australia Bank slipped into a small loss in the past six months, its profits ravaged by escalating bad debts and a series of one-off charges including looming tax headaches in New Zealand.
Chief executive Cameron Clyne also doused rising hopes that the banking sector might have seen the worst of the lending losses that have sliced billions of dollars from bank earnings in the past year.
Despite signs that the big-name corporate losses experienced at the start of this year were subsiding, Mr Clyne warned it might be at least another 12 months before he could declare whether the damaging bad-debt cycle had peaked.
Even with Australia sidestepping the worst of the global economic downturn, rising interest rates and a high currency could present further challenges.
The banking giant was surprisingly downbeat about the outlook for the business lending market.
''There are signs of improving sentiment, but the caution we see is more to do with the economy than anything that's NAB specific,'' Mr Clyne told businessday.
His comments came as NAB revealed a headline loss of $75 million for the six months to end-September, after being hit with one-off charges of more than $1.88 billion for the half-year linked to a range of legacy issues.
After stripping out the charges, cash earnings for the half came in at $1.81 billion, down 10.5 per cent on the March half.
NAB's full-year cash earnings of $3.84 billion were in line with consensus and down just 1.9 per cent on the previous year thanks in large part to the repricing of business loans in Australia and elevated treasury income.
Analysts were buoyed by NAB managing to claw back interest margins, a key driver of profit, during the second half, mostly as it pushed through interest rate rises across business loans. While margins were flat on the year at 2.25 per cent, group margins were up from 2.07 per cent on the first half.
Still, some fear commercial property could again rear as a headache, particularly as NAB's 17 per cent exposure to the troubled sector is double that of rivals such as Commonwealth Bank.
Despite the second-half headline loss, NAB held its final dividend at 73¢ a share by dipping into its reserves. This took the full-year dividend to $1.46 a share.
Mr Clyne would not be drawn on a guarantee to keep future rises in interest rates in step with those made by the Reserve Bank. Rather he promised to be transparent on the way funding costs impacted pricing on mortgages.
''The commitment we give is that we'll be competitive,'' he said.
Mr Clyne, who took charge in January, has embarked on the bank's biggest acquisition spree since earlier this decade, adding life insurance, mortgage and stockbroking businesses to generate new earnings away from traditional banking operations.
He talked down the prospect of large-scale acquisitions but was open to further opportunities that would boost distribution, particularly in Australia.
While NAB has not run into the depth of problems of many global banks, investors have been cautious towards the lender given its exposure to the British economy, which is mired in recession.
At the same time, NAB is sitting on billions of dollars of out-of-money credit instruments, some of which are exposed to US mortgages and commercial property across Europe.
NAB's bad debt charge of $3.81 billion for the year compares with $2.49 billion for last year. The increase was mostly due to a rise in the number of big business customers early in the year.
With NAB's bad debt charge now running at 0.87 per cent of average loans, the bank is sitting on some of the highest losses among its rivals as a proportion of its lending book.