NAB reports flat cash earnings with strategy on track  

  • By Christine St Anne

National Australia Bank reported flat cash earnings of $1.7 billion in its trading update with its turnaround strategy on track, according to its CEO Ross McEwan.
On Tuesday, NAB announced an unaudited cash profit of $1.65 billion for the three months to December 2020, flat compared with the previous year. However, compared with the second half, cash earnings rose 47 per cent. 

The result exceeded analyst expectations particularly on the loan impairment front.
 “We expected a strong rebound in profit, but [NAB’s] first quarter cash profit exceeded our expectations,” Morningstar bank analyst Nathan Zaia said.

UBS bank analyst Jon Mott called it a solid trading update.

Loan impairment expenses of $15 million were low, down 98 per cent on the quarterly average over fiscal 2020.

Zaia liked the figure.

“For context, the loan impairment expense in first quarter 2020 (pre-COVID) was  $185 million.

“With the banks large loan loss provisions taken when the economic outlook was weaker, and the bank today commenting that customers exiting deferrals are performing better than expected so far, we believe the loan loss outlook has improved.” Zaia said.

At one basis point, UBS bank analyst Jon Mott said that NAB had recorded its lowest credit impairment charge since it began reporting quarterly earnings in 2008. 
Mott noted that this reflected a benign quarter and changes to overalys taken in fiscal 2020. 
According to McEwan, an improving economy has been a key driver of the first quarter trading result, underpinned by low credit impairment charges. 
The number of loans on deferrals also fell. 
Mortgage deferrals fell to about $2 billion, compared to peak levels of $38 billion, while business loan deferrals fell to about $1 billion, also significantly down from peak levels of $19 billion. 
“Improving economic and health outcomes in Australia and New Zealand are encouraging, as are the reductions we are seeing in deferral balances,” McEwan said. 
McEwan said that the bank’s strategy was also “proceeding well as we invest for the long term and focus on initiatives that make a real difference to our customers and colleagues”. 
While he said there was much to do, it was “pleasing to see momentum building in our core businesses as we simplify and streamline our processes and policies”. 
The bank reported a 1 per cent fall in expenses, in part due to productivity improvements and continues to target expense growth ranging from  0 to 2 per cent. 
Net interest margin also declined but was stable as competition and the impact of low interest rates were offset by home loan repricing and lower funding and deposit costs. 

Morningstar’s Zaia expects the benefits of less systems and more streamlined loan processing to allow the bank to reduce branch and staff costs over time.
Despite a solid result, Mott highlighted that the bank’s asset quality began to slip in January with non-performing loans rising to 118 basis points from 101 basis points in December as a group of home loan customers who exited deferrals in October were not able to restart their repayments. 
However, as noted earlier, deferrals are trending downwards, and for Mott this is not yet a concern adding that its collective provisions compared to its credit risk weighted assets was 155 basis points, broadly in line with its peers and in his view, “likely sufficient given the improving outlook and rising house prices”. 
The bank also said that 440 new hires have been made to its business and private banking division and has targeted a further 110 over the remainder of fiscal 2021.
McEwan signalled headwinds for the bank despite the positive result. 
“There are a number of uncertainties requiring further clarity. These include the impact on customers of ongoing health alerts and measures put in place to contact the spread of COVID-19, and the wind-down of deferral and jobkeeper programs.”