National Australia Bank is expecting at least another 18 months of rising bad debts as the domestic economy continues to be ravaged by the global recession.
The bank, which today reported a 10% fall in half year cash profits to $2 billion, indicated that the remainder of the current calendar year will be marked by rising sour loans within the business sector with 2010 being affected by higher consumer bad debts as unemployment takes its toll of the workforce.
However, NAB's chief executive Cameron Clyne remains optimistic that signs of fresh economic growth could begin to emerge next year as the Australian economy weathers the worst of the worldwide downturn.
His comments came as NAB disclosed that rising bad debts across the whole of the bank's domestic and international operations were to blame for the fall with its collective provisions jumping $1.2 billion to $3.6 billion in the six months to the end of March.
The half year profit decline was directly attributed to an increase of $1.1 billion in the overall sour loan charge to NAB's accounts - a figure that now stands at $1.8 billion.
In all, NAB has now set aside $4.9 billion to cover for bad and doubtful debts over the last year as the domestic economy has turned down in the face of the most savage worldwide recession since the 1930s.
That figure contains a $500 million jump in specific bad loans to $1.3 billion but it is now the spread of the slowdown across the whole of NAB's different businesses in Australia, New Zealand, the UK and - to a lesser extent - in the US which has required it to increase its provisioning.
It is also preserving capital to help keep its lines of funding open and its core financial pillars strong by cutting back on its half yearly payout to shareholders and by underwriting its dividend reinvestment plan to the tune of $500 million.
NAB also warned that it expects a further increase in bad debts over its next set of results due in October and possibly well into next year as the recession continues to bite into the domestic economy.
Mark Joiner, the bank's finance director, told analysts this morning that situation regarding sour loans was likely to get worse and it was difficult to predict when the position would settle down "given the uncertainty in the world".
The priority as recently-retired chief executive John Stewart had outlined late last year was to keep the bank strong in the current financial climate said Mr Joiner. This was reflected in an increase in its Tier One capital structure to 8.35% over the last half which would be reinforced by the cut in the interim dividend and the decision to raise the additional $500 million through the underwriting of the dividend reinvestment plan.
NAB also strengthened its core balance sheet position with the $3 billion share placement with institutional investors last November.
Mr Joiner also underlined the bank's strength in terms of its liquid assets which had grown by $21 billion since March last year to a current $87 billion.
At the close of trade today , NAB's shares were down 76 cents, or 3.4%, at $21.28.
Dividend slashed
NAB has slashed its interim dividend by almost 25% which translates into a drop of 24 cents to 73 cents a share, fully franked.
Dividend cuts have been widely flagged across the banking sector with ANZ due to unveil its own 25% fall tomorrow when it reveals its half year results. Westpac will almost certainly follow suit next week with its profit announcement.
NAB chief executive Cameron Clyne, who succeeded to the top job on January 1 having replaced John Stewart, blamed the tough economic conditions for today's lower earnings.
The position had continued to deteriorate during the half year, said Mr Clyne, a reflection of slowing growth which has since seen the Federal Government and the Reserve Bank now admit the Australian economy is officially in recession.
''We continued to grow revenue whilst carefully managing costs but this was offset by increased bad and doubtful debts and higher funding costs,'' added Mr Clyne.
The flight to quality by both customers and investors saw revenue jump 11.5% to $8.5 billion.
And like its Australian peers, NAB's bottom line remains much stronger than the majority of its international counterparts, many of whom in Britain and the US have continued to rack up losses of billions of dollars and have required government support to remain afloat.
And it was NAB's Australian business which continued to drive its half year profits with the division's cash earnings rising by 2% at the operating level to $1.6 billion. That was despite a more than 50% increase in its own bad debt charge.
The domestic operation was boosted by a 9% increase in revenue thanks to good contributions from both business banking and its retail branch network. Business banking was helped by customers switching from weaker lenders as they sought to tap new financing albeit at a higher cost to them.
But the domestic arm - which accounts for two thirds of the group's overall profits - was held back by a fall in earnings at its wealth management division, MLC, which saw its cash earnings drop 28% to just $158 million on the back of weaker financial markets.
British banks earnings slump
As for NAB's British banks, Clydesale and Yorkshire, their cash earnings slumped by almost two-thirds - 64% - to only 50 million pounds as the combination of higher debts and their inability to pass on higher funding costs caused by competitive pressures hit their respective bottom lines.
NAB has little alternative but to keep faith with its UK division given that the industry has been blighted by the global financial crisis which has resulted in two of the country's biggest banks being nationalised.
However, they are perceived to be among the strongest of the mid-tier lending institutions - a factor which was reflected by an increase in lending volumes of almost 10% a jump in retail deposits of almost 15% during the half year.
Mr Clyne ruled out any need at present to inject new capital to shore up the banks in light of the savage UK recession, saying that its Clydesdale and Yorkshire banks were still profitable and would therefore not be a drag on the group.
The British division had recently raised 700 million pounds of new capital to strengthen its balance sheet in response to "severe "stress tests conducted across the country's banking sector by the UK's corporate regulator, the Financial Services Authority, and that was considered more than enough for NAB's subsidiaries to cope with any worsening of the local economy.
NAB also continues to do it tough - but to a lesser extent - in New Zealand whose economy was amongst the first to go into recession.
The New Zealand division, which Mr Clyne previously ran before his elevation to chief executive, saw its bad debt charge reduce its cash earnings by 4.6% to NZ$228 million although revenue rose 5% to NZ$755 million.
NAB, though, did better in the US where Great Western Bank, which it bought for $800 million just over a year ago, actually increased its profits by just over a quarter to $US27 million. Great Western has so far managed to avoid the worst of the downturn in America.
But the bank has not been so lucky with its corporate banking division, nabCapital, which is the middle of a major operational overhaul, having racked up a disappointing result at the last full year.
nabCapital had been responsible for a huge jump in bad debt charges then as a consequence of its investment in complex financial derivatives which made NAB the most exposed of the Australian banks to US subprime housing loan crisis.
Whilst the division experienced a 30% increase in half year revenue to $1.5 billion thanks largely to its global markets operation, its earnings continued to fall this time, by 7.5%, because of the need to cover for further bad debts.
Its provisioning during the six months more than doubled to $628 million because of its sour loan problems.
Power out
Meanwhile, power was disrupted to NAB's Sydney offices this morning, a spokeswoman said.
The blackout, which hit much of the city, ''did delay the beginning of our investor presentation, which is now up and running to plan,'' she said.
The outage lasted 40 minutes before a back-up power supply kicked in. A webcast of the event was also restored.
djohn@smh.com.au
SMH
