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NAB share price on watch as it slashes earnings and dividend

The National Australia Bank Ltd. (ASX: NAB) share price is in the hot seat this morning after the bank unveiled a cut to both earnings and dividends.

But the fully-year profit results won’t be the only thing setting tongues wagging. NAB has resisted joining Westpac Banking Corp (ASX: WBC) from launching a capital raising to shore up its balance sheet.

It may be counting on the spin-off of its MLC wealth business in FY20 to provide a cash buffer, but I think it’s a missed opportunity for NAB to put the capital question to rest like Westpac has. This could be a bigger driver for the share price than the results.

Capital adequacy overshadows earnings drop

NAB reported a 10.6% dive in FY19 cash earnings to $5.1 billion and a 16% reduction in the final dividend to 83 cents a share.

The result shouldn’t shock anyone. The results from ANZ Banking Group (ASX: ANZ) and Westpac softened expectations.

While NAB may have lowered its dividend, the payout ratio stands at over 91%. This is likely to keep investors guessing if further dividend cuts are in the wings, especially given that management can’t tell how much more cash it needs to set aside for customer compensation.

Customer remediation continues to weigh

The compensation issue which stems from the Banking Royal Commission is arguably the biggest drag on NAB’s bottom line. If not for this (and a change in its software capitalisation policy), cash earnings would rise 0.8%.

The bank recognised charges of $1.1 billion in FY19 and assigned 950 staff to process compensation for aggrieved customers.

The compensation payments also weighed on its net interest margin (NIM). This key measure between what it cost for the bank to borrow and how much it makes on loans fell 7 basis points to 1.78%.

Bad debt still looking good

Similar to its peers, NAB reported an increase in borrowers falling behind payments. Credit impairment jumped 18% to $919 million, while 90+ day delinquencies increased 22 basis points to 0.93%.

While both figures are still low and unlikely to cause concern, the trend is going in the wrong direction for the sector. The sharp improvement in Melbourne and Sydney house prices is a positive in this regard.

On the upside, NAB’s Common Equity tier-1 (CET1) ratio inched up to 10.38% from 10.2% in FY18, and the bank reported growth in business lending. This is an area that NAB outshines the other big four banks, including Commonwealth Bank of Australia (ASX: CBA).

But I don’t think the silver linings in its results will be enough to keep the capital-adequacy monkey off NAB’s back. Don’t be surprised if NAB comes around a’calling with its cap in hand in the not too distant future

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, and Westpac Banking. 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.