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What you need to know about NAB’s profit update

The National Australia Bank Ltd. (ASX: NAB) share price is likely to find support this morning after it posted its third quarter earnings update.

Cash profit for the period inched up 1% over the same time last year to $1.65 billion as net interest margin (NIM) improved.

This stands in contrast to Commonwealth Bank of Australia’s (ASX: CBA) profit results earlier this month that showed a decline in both key measures.

What to like about NAB’s results

Thanks to low expectations and a high wall of worry that banks are currently forced to scale, NAB’s tiny growth could be enough to excite the bulls and reassure income seeking investors that the bank won’t need to cut dividends again.

What will also lift sentiment towards NAB is that management has managed to hold costs flat as revenue increased.

This is largely driven by the big bank’s transformation program to simplify its operations, while its efforts to expand small and medium enterprise (SME) lending appears to be paying off.

“Against the backdrop of a challenging operating environment, including subdued home lending growth, our 3Q19 performance compared with the 1H19 quarterly average is solid,” said NAB’s outgoing chief executive Philip Chronican.

“Our focus on being simpler and faster for our customers has resulted in a 27% reduction in over-the-counter transactions and an 18% reduction in call centre volumes since the transformation began.”

Not all good news

But it isn’t all good news on the cost front. Management believes it will need to increase provisioning and face higher expenses from the Banking Royal Commission fallout.

“As previously highlighted, customer remediation programs and regulatory compliance investigations are continuing with potential for additional costs,” said Chronican.

“While amounts and timing remain uncertain, additional provisions are expected to be recognised in 2H19, including for adviser service fees for self-employed advisers.”

Further, loan delinquencies are increasing, even though that’s coming off a low base. This trend is expected for the other big banks as well, including Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC).

Loans that are 90 days or more past due climbed 14 basis points over the June quarter 2018 to 0.85% – the highest since at least the fourth quarter of 2017.

But investors may be prepared to overlook this given that the bank’s operational performance shows signs of having turned a corner.

Also, some institutional investors have expressed confidence that NAB’s incoming boss Ross McEwan is the right man to pull the bank out of the funk.

For now, the market may be willing to give NAB the benefit of the doubt – and that counts for a lot in this market.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited and Commonwealth Bank of Australia. Connect with him on Twitter @brenlau.

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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