National Australia Bank Ltd announces 11% increase in profits

Lower bad debts and improvements in the UK division helped boost profitability.

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In what National Australia Bank Ltd’s (ASX: NAB) CEO Cameron Clyne described as a solid first quarter, the bank today announced a $1.4 billion net profit for the period – an increase of 11% compared to the prior corresponding period.

Cash profit (which is a preferred measure amongst analysts as it disregards one-off expenses) increased by 7% to $1.55 billion, which was slightly above what the market had been expecting.

While the bank is Australia’s biggest player in business lending, it failed to recognise a meaningful increase in demand despite improved business confidence. Instead, the bank lost ground during the quarter due to a heavy push into the market by rival Australia and New Zealand Banking Group (ASX: ANZ). On the other hand, the bank has been growing strongly in the mortgage market as Australia’s banks ramp up their competition to win over customers due to the low interest rate environment.

Bad and Doubtful Debts

As was the case with Commonwealth Bank of Australia (ASX: CBA) and ANZ, which both reported earlier this month, NAB’s result was in large part driven by an improvement in bad debt charges. The charge for bad and doubtful debts was just $324 million which was a 23% improvement, thanks to lower charges in Australian Banking and the UK businesses.

NAB’s UK arm

While the UK businesses have acted as a drag on NAB’s overall earnings for a number of years, the bank saw further improvements over the course of the period due to the substantial restructure undertaken in 2012 and the continued recovery of the UK economy.

However, Clyne warned that there was now an increased risk that additional provisions will be required for UK conduct related matters. This is because since the 2013 full-year results,  there have been an increased number of complaints, settlements and possible higher claims relating to the UK divisions.

Although no mention was made of a potential sale this year, I expect that further investments will be made to the businesses in order to attract a prospective buyer. While improvements have been made, investors would be happy to see the bank part ways with the UK businesses.

Dividend

As this was only a quarterly update, no dividend guidance was given. However, the group’s Basel III Common Equity Tier 1 ratio was 8.21% as at 31 December 2013, which was lower than the ratio at 30 September 2013, impacted as it was by the final 2013 dividend declaration.

In order to build up its capital reserve, the bank (like its peers) will likely be limited in the medium term in increasing payouts to shareholders.

Foolish takeaway

Despite the strong growth in profit for the period, investors smashed the stock down 2.5% in early trading while each of its peers recognised gains. While some investors would recognise this as an opportunity to buy, I believe that each of the major banks still represent expensive investment prospects and that investors should be looking for better alternatives.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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