For the past two years bank chief executives have been explaining away the rising trend in bad and doubtful debt charges by saying rhe increases were off a low – abnormally low – base.

The tone of the discussion changed yesterday when National Australia Bank’s chief executive designate, Cameron Clyne, said the bad-debt cycle had some way to run and offered his reasons why the level of bad debts would not rise to the recessionary levels of 1991.

The bank did not have much good news to sell yesterday but outgoing CEO John Stewart tried to make the best of a bad lot by claiming that NAB’s Australian banking operation had the lowest cost to income ratio in the sector, at 40.6 per cent, and that the bank was liquid, well funded and had excellent cost management disciplines.

Nor was there any announcement of a plan to raise capital beyond the underwriting of the dividend and making use of space capacity to sell hybrids that count as tier one, plans both announced last week.

The big numbers in the result were all charges and provisions. The bank’s charge for bad and doubtful debts rose from $740 million in 2007 to $2.5 billion.

Of that, $1.1 billion was due to nabCapital’s much-publicised exposure to collateralised debt obligations in its conduit funding vehicle.

The bad and doubtful debt charge in the Australian banking operation rose 55 per cent from $389 to $603 million.

In the UK operation the charge rose 47 per cent from $119 to $175 million. And in New Zealand the increase was 28.8 per cent, from $52 to $67 million.

The bank said the business environment in the UK was deteriorating, there had been a small number of large corporate impairments in Australia and “a number of customer downgrades” (to Allco, for example).

The collective provision increased by 32 per cent to $2.8 billion.

The ratio of gross impaired assets to gross loans and acceptances rose over one year from 0.28 to 0.49 per cent.

Clyne said bad and doubtful debts would rise in the year ahead.

He said: “Four things give us comfort that it won’t go to ’91 levels. We have better security, we have a more diversified loan portfolio. Our corporate and SME customers have stronger balance sheets. And unemployment will not go as high as 1991.”

Group cash earnings of $3.9 billion were down 10.7 per cent on the 2007 result. Return on equity was 14.3 per cent. Return on assets fell from 0.84 to 0.64 per cent.

A very low tax rate helped, at 23 per cent over the year and only 19 per cent over the half, excluding the tax benefit attributable to the statutory funds of the life insurance business. Taking that into account, NAB’s income statement shows a tax expense of only $39 million over the full year, a detail that might represent the chief surprise of this profit.

The final dividend was 97 cents a share fully franked. The full year dividend was up 6.6 per cent on the previous year.

The net interest margin for the Australia banking operation remained steady at 2.42 per cent.
by John Kavanagh & Ian Rogers
22nd October 2008

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