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National Australia Bank Ltd (ASX:NAB) posts 14.2% decline in cash earnings

The National Australia Bank Ltd (ASX: NAB) share price will be on watch on Thursday following the release of its full year results this morning.

Here is a summary of how the bank performed in FY 2018 compared to a year earlier:

  • Net interest income rose 2.3% to $13,467 million
  • Underlying profit down 12.4% to $8,985 million.
  • Cash earnings fell 14.2% to $5,702 million.
  • Common equity tier 1 (CET1) ratio up 14 basis points to 10.2%.
  • Final dividend flat at 99 cents per share, bringing total dividend to $1.98 per share.
  • Credit impairment charges declined 3.8% to $779 million, and as a percentage of gross loans and acceptances declined 1bp to 13bps.

Overall, I thought this was a reasonably solid result from National Australia Bank given the tough trading conditions. However, it has fallen short of expectations and could potentially mean its shares come under pressure today.

According to a note out of Goldman Sachs, it expected the banking giant to post cash earnings of $5,774 million (pre-one-offs), down 13.1% on the prior corresponding period. This compares to the Bloomberg consensus of $5,764 million.

Unlike rival Australia and New Zealand Banking Group (ASX: ANZ) yesterday, National Australia Bank’s cash earnings of $5,702 million fell short of both estimates.

What happened?

This underperformance was caused largely by its Consumer Banking & Wealth segment. It posted a 5.8% decline in cash earnings to $1.539 million due largely to a decline in the housing margin. This was caused by intense competition and a change in lending mix.

This offset a solid performance by its Business & Private Banking segment. It delivered a 2.5% increase in cash earnings to $2,911 million. Management advised that this reflected stronger SME business lending and higher margins. Its performance would have been even stronger had it not been partly offset by increased operating expenses due to the acceleration of investment spend combined with higher credit impairment charges.

The company’s New Zealand Banking segment was another strong performer. It posted a 6.7% rise in cash earnings to NZ$1,004 million. This was driven by higher margins and good lending growth, but partly offset by accelerated investment.

Finally, the bank’s Corporate & Institutional Banking segment posted a 0.4% increase in cash earnings to $1,541 million. Management advised that the stable result was due to increased non-markets revenue and lower credit impairment charges. This was offset by lower markets revenue and accelerated investment spend.

CEO Andrew Thorburn appeared to be pleased with its bank’s performance during a challenging year.

He said: “Our FY18 result was impacted by restructuring-related costs and customer-related remediation, with cash earnings 14% lower than FY17. Excluding these items, cash earnings declined 2% due to higher investment spend as we accelerate investment to transform our business. Pleasingly, revenue was higher with good lending growth and stable margins.”

Before adding that: “Asset quality and balance sheet metrics remain sound, and we have a clear path to achieving APRA’s unquestionably strong CET1 target of 10.5% by January 2020.”

Should you invest?

While I didn’t think it was as strong a result as ANZ Bank’s on Wednesday, it wasn’t bad given all the issues the banks are facing.

Although I do think it could be a good option for income investors, I would still pick ANZ Bank and Westpac Banking Corp (ASX: WBC) ahead of it. Though, Westpac’s results are due to be released next week, so investors may be better off waiting for those before buying its shares.

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Motley Fool contributor James Mickleboro owns shares of Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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