By Millie Muroi
National Australia Bank has signalled it is confident households and businesses can weather the slowing economy and the sharp rise in interest rates, unveiling a $1.5 billion share buyback as its third-quarter profits beat market expectations.
NAB chief executive Ross McEwan said there had been a “modest deterioration” in the quality of the bank’s loans, but he was the latest major bank boss to reassure investors that consumers remained resilient after CBA and Bendigo also reported modest indicators of financial stress.
Releasing a trading update on Tuesday, the country’s second-largest bank announced it planned to start the buyback later this month, as it reported a 5.8 per cent increase in its third-quarter profit to $1.9 billion. The growth in profit came against a backdrop of higher interest rates but also slowing growth, inflationary pressures and elevated competition.
“We know this environment is challenging for our customers, but pleasingly, most are proving resilient with only a modest deterioration in asset quality in the third quarter,” McEwan said.
NAB’s unaudited cash earnings for the June quarter were 5 per cent lower than the average across the December and March quarters, but grew 5.8 per cent relative to the same period last year to $1.9 billion, exceeding analyst expectations.
Shares in NAB closed 1.3 per cent higher on Tuesday to $28.7 a share.
McEwan said small-to-medium enterprise business lending increased 4 per cent over the quarter, but that home lending grew below the broader sector’s growth of 1 per cent. Gross loans were broadly flat.
NAB’s net interest margin – which compares funding costs with what it charges for loans, and which McEwan said had peaked in the bank’s May trading update – fell 5 basis points to 1.72 per cent.
The bank said the margin decline was a result of continued home lending competition combined with higher deposit costs, partly offset by a higher interest rate environment.
NAB also announced a buyback of up to $1.5 billion of ordinary shares on-market, set to commence in late August subject to market conditions. “This decision is consistent with our focus on maintaining a strong balance sheet through the cycle, while progressively reducing our share count over time,” McEwan said.
The bank said its credit impairment charge increased $9 million to $244 million over the quarter reflecting volume growth and a modest deterioration in loan quality.
NAB said its proportion of 90-day arrears and impaired assets compared to its loans and acceptances increased 5 basis points to 0.71 per cent. “This mainly reflects a modest deterioration in delinquencies across the group’s home loan and business lending portfolios,” the bank said.
UBS analyst John Storey said NAB’s trading update was better than expected and that the credit cycle still appeared benign.
“The trends which NAB have reported for the third quarter are consistent with what we have seen so far at CBA and Bendigo,” he said. Storey added that while the bank’s earnings and net interest margin declined, overall loan quality and credit impairment charges came in better than expected, with NAB on track to deliver cash earnings in line with fourth-quarter expectations.
Citi analyst Brendan Sproules said NAB’s cash earnings were below his forecasts and an overall “soft” result. Despite an increase in costs, Sproules said NAB had a strong balance sheet and that the buyback suggested the board was comfortable with the bank’s asset quality.
E&P Financial banks research executive director Azib Khan said NAB’s cash earnings were in line with his expectations, but that the bank’s pre-provision profit was under pressure as costs increased relative to income.
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Source: Thanks smh.com