Unforgiving investors marked National Australia Bank (ASX: NAB) shares more than 8 per cent lower today despite the bank reporting an 11.7 per cent increase in interim net profit to $3.97 billion.
However, while a surge in business banking earnings and fatter margins from higher interest rates drove NAB’s cash earnings 17 per cent higher to a record $4.07 billion for the six months to the end of March, the result fell short of consensus analyst expectations of $4.18 billion.
NAB’s shares, which fell to a low of $26.22 in morning trading on the result, were also impacted by the uncertain economic outlook which was reflected in a surge in the credit impairment charge to $393 million from $2 million previously.
While NAB’s CEO Ross McEwan says the bank is not seeing 'a major problem at this point', he adds that 'we are on a watchful eye'.
"We’ve made contact now with 7,000 of our mortgage customers that we thought may have been having a little bit of difficulty - now this is in the last three months, so this is as they rolled from a fixed rate of around 2 per cent to a fixed rate more around 5 to 5.5 per cent," McEwan says.
"Out of the 7,000, only 13 have said ‘yes we would like some help’. So I think it’s showing the resilience in the marketplace. It's showing that full employment, unemployment being at 3.5 per cent is really helping and that’s the crucial thing to watch out for, the unemployment level."
NAB says its collective credit impairment provisions are 'prudently set at 1.42 per cent of credit risk weighted assets', which it says is well above pre-COVID levels.
“While there are encouraging signs that inflation is moderating and interest rates are peaking in Australia, the full impact of higher cost of living and higher interest rates on the outlook remains uncertain, particularly the extent to which households reduce discretionary spending and potential flow-on consequences to the broader economy,” McEwan says
NAB’s business banking division led the group’s profit increase, with interim cash earnings up 19.9 per cent to $1.71 billion. Higher revenue in the division was driven by volume growth and increased margins, although a higher staff wages bill led to an increase in operating expenses.
Credit impairment charges were higher in both business lending and the personal banking divisions.
Investors were also miffed by a lower-than-expected interim dividend of 83c per share, up from 73c a year ago. Analysts had been expecting 86c.
McEwan notes that the impact of higher living and interest costs on household spending is ‘becoming evident’.
“Early signs that inflation is moderating are encouraging and we remain optimistic about the outlook - our bank and most customers enter this period from a position of strength and we are well placed to continue managing our business for the long term,” he says.
“We remain focused on the disciplined execution of our strategy to drive sustainable growth in earnings and shareholder returns over time."
NAB shares regained ground by lunchtime trading to be $1.56 or 5.5 per cent lower at $26.99 at 12.35pm (AEST).
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