National Australia Bank Swings to Profit -- Update

By Robb M. Stewart Features Dow Jones Newswires

MELBOURNE, Australia--National Australia Bank Ltd. (NAB.AU) held its interim dividend steady after swinging back to a profit, although it signalled wariness about its exposure to real-estate developments with the surge in new apartments built in major cities.

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The bank, which a year ago was dragged to a first-half loss by costs for spinning off and listing its British operations, on Thursday said it had benefited from growth in lending and stronger trading income over the last six months. However, its lending margin remained under pressure and its charge for soured loans rose.

Stagnant wage growth and below-trend growth in Australia's economy, coupled with regulatory efforts to cool riskier mortgage lending, has threatened the outlook for Australian banks that have in recent years notched up record profits as they have benefited from strong demand for home loans and relatively low levels of bad debts.

Australia & New Zealand Banking Ltd. (ANZ.AU), another of Australia's biggest lenders, earlier this week said its lending margin had been squeezed by competition and higher funding costs, and Chief Executive Officer Shayne Elliott pointed to a constrained environment for lenders.

"The operating environment for banks remains challenging," said NAB Chief Executive Andrew Thorburn, pointing to risks including heightened regulatory change and household debt levels at historical highs.

For the six months through March, the bank reported a net profit of 2.55 billion Australian dollars (US$1.89 billion) against a year-earlier loss of A$1.74 billion. Cash earnings--a measure that excludes some gains and costs and is favored by analysts--rose 2.3% to A$3.29 billion, in line with expectations.

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Since taking over as CEO in August 2014, Mr. Thorburn has refocused the bank on its core franchises in Australia and New Zealand in a bid to improve returns. At the start of last year, NAB spun off and floated CYBG PLC (CYBG.LN), a company housing Clydesdale and Yorkshire Bank in the U.K., which gave rise to a A$4.22 billion loss. It has also sold a controlling stake in its life insurance business and exited regional U.S. lender Great Western Bancorp Inc. (GWB).

The bank's overall charge for bad and doubtful debts rose 5.1% year-over-year to A$394 million, which Mr. Thorburn said was due to a A$89 million increase in the collective provision overlay mainly for risks in the A$60 billion commercial real-estate portfolio.

The possibility of an apartment oversupply in Sydney and Melbourne and stresses on mining-exposed parts of the country in the east and west meant the bank needs to be more conservative with a portfolio that was holding steady, Mr. Thorburn said. "It just gives us some extra protection."

Like its peers, NAB's margins have been squeezed by stiff lending competition and, more recently, higher funding costs. NAB's net interest margin, a measure based on the difference between the rate at which a bank borrows and lends--narrowed by 11 basis points year-over-year to 1.82% but was flat against six months earlier.

ANZ recorded a contraction its net interest margin compared with the same period a year ago, and said its loans at least 90-days overdue had picked up modestly but appeared to have stabilized.

Westpac Banking Group Ltd. (WBC.AU) is due to report its half-year results on Monday and Commonwealth Bank of Australia Ltd. (CBA.AU), the country's biggest mortgage lender, is expected to provide a third-quarter update a day later.

Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

May 03, 2017 22:15 ET (02:15 GMT)