NATIONAL Australia Bank has left the door open to start raising interest rates on mortgages to ease pressure on funding costs, even as the Reserve Bank is again tipped to cut official cash rates.
NAB sparked intense political and customer criticism this month after it refused to pass on interest rate cuts to mortgage holders, blaming the rising cost of wholesale funding.
While there were no immediate triggers to pursue interest rate rises out of step with the RBA, NAB chief executive Cameron Clyne acknowledged this was one option to ease pressure on margins from steadily rising funding costs, particularly as deposits were now being repriced at a higher rate.
"The reality is we're facing a structural shift in the funding profile of the bank. Average costs are going up and we're just going to have to monitor that," Mr Clyne told BusinessDay.
NAB yesterday handed down a 9.4 per cent drop in first-half cash earnings as the economic downturn caused a more than doubling of the bank's bad debt charges, to $1.8 billion.
Mr Clyne warned that the economic slowdown might last until next year, as Australia finally succumbed to the global recession. This was likely to push bad debts across the banking sector higher over the next two years as lending losses began shifting from business customers to mortgages and credit cards. "The economy is deteriorating, we are going into a recession — there's no question about that," Mr Clyne said.
NAB's cash profit of $2.03 billion for the six months to the end of March, while in line with market expectations, was down from $2.24 billion in the previous corresponding period.
Only one of NAB's four operating businesses — the Australian bank — managed to deliver an increase in earnings, and even then its profit was up barely 2 per cent.
As expected, NAB slashed its dividend by about 25 per cent to 73¢ a share as part of efforts to preserve capital. This is expected to trigger similar moves from rivals.
While NAB has not run into the depth of problems of many global banks, it has been out of favour with investors given its big exposure to the British market, which is suffering its worst recession since World War II.
At the same time, it is sitting on billions of dollars of troubled credit instruments, some of which are in the US mortgage market and commercial property in Europe.
NAB's bad debt charge of $1.81 billion was higher than expected and was well up from the $726 million in the first half of 2007-08. The increase was mostly due to a rise in the number of big business customers running into trouble, while the bank was forced to top up its collective provision charge to act as a buffer against more loans turning sour as the economy slows.
NAB's total losses on bad debts are $4.3 billion since the downturn hit last year.
NAB shares fell 3.5 per cent to $21.28, although the banking sector generally was buffeted on concerns US banks would be forced to raise more capital.
NAB's Australian operation — which accounts for two-thirds of group profit — was held back by a fall in earnings at its wealth management division, MLC. Cash earnings of $1.6 billion were nonetheless up 1.9 per cent as revenue surged nearly 10 per cent.
The British arm experienced a 64 per cent slump in cash earnings to only £50 million ($103.7 million).
One bright spot was the 11.5 per cent increase in group revenue to $8.5 billion as a fall away in competition drove customers to the Big Four banks.
