National Australia Bank Earnings Up 8%, but Still Room for Improvement

Banks haven’t been the stable institutions we expected them to be. Recent turmoil is boiling over in Europe. And it’s put a damper on banks in general. Market selloffs of European banks started last week, with some dropping by double digits. When the news of overwhelming decline hit our shores, the big four banks were all affected. They declined around 5%, with smaller ones dropping even more.

Yet, finally, light is starting to shine through the clouds. National Australia Bank [ASX:NAB] announced their FY16 first quarter performance. And the results were a pleasant surprise. Investors could finally see whether analysts were correct in predicting sluggish banking profits. This was not the case for NAB. Cash earnings increased 8% to $1.7 billion.

NAB also managed to increase revenues 4% (if legal settlements are excluded). Revenues climbed on the back of increased lending volumes and a higher net interest margin (NIM). However, NIM was offset by higher funding costs and competition within the market.

NAB’s stock hardly reacted to the news. The share price sluggishly climbed 1.5% to a high of $25.01 per share. But why didn’t shares climb higher if the news was good?

National Australia Bank NAB Bank Earnings Share Price

Source: Yahoo Finance

Bank investors still jittery

If it seems like investors weren’t happy with NAB’s results, it could be down to two factors. The first revolves around NAB’s ‘expenses’ problem. NAB was able to increase revenues, but expenses also followed closely behind. Expenses increased around 5%, which outpaced revenue growth once legal settlements are included. NAB’s reason for the increase in expenses was a growing wage bill.

An Enterprise Bargaining Agreement, jargon for wage negotiations, had increased along with high redundancy costs. Both factors added to the 5% increase. NAB stated that expense growth would likely decline to 4.1% for FY16. But this meant excluding current impacts.

This brings me to the second factor.

As I mentioned above, European banks are feeling the heat. Lenders across Europe are deemed ‘risky’; whether that’s true or not is debatable. But their recent turmoil has spread, reaching Australian shores early last week.

The general decline in banks has brought in bargain hunters. Yet investors are still unsure if massive dips in the banking sector will eventuate anytime soon. With the added pressure of general pessimism, banks are now also dealing with stricter regulations. This has put a strain on their ability to maintain explosive earnings. The public hasn’t caught on yet, but it’s now harder for banks to achieve breakthrough figures. When actual earnings start falling short of expectations, banking shares might fall further.

NAB CEO, Andrew Thorburn stated, ‘Our performance in the first quarter demonstrates continued momentum across our Australian business and our focus on delivering a great customer experience, particularly in key customer segments.’ Thorburn’s comments don’t seem to address the bigger picture. Of course, he will only focus on the positives, but I’m sure shareholders are more concerned with solutions.

Losing money on Clydesdale

Clydesdale Bank [LSE:11IO] is NAB’s attempted foray into the British market. Clydesdale’s IPO was undertaken earlier this month, which netted NAB up to $805 million. Or so they thought. NAB said it expects to make a loss of around $4.2 billion on the demerger. The loss will not affect dividend policy or reported first half earnings, but it’s still a loss.

NAB is taking an enormous gamble on the Clydesdale play. And if it doesn’t evolve as planned, NAB might not be undertaking such a venture anytime soon. Cash earnings for H1 2016 will be announced 31 March, giving investors a better barometer of the whole Clydesdale situation.

Until then, NAB’s shares, along with most other banks, might continue their volatile trading until European markets calm down.

Härje Ronngard,

Junior Analyst, Money Morning

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