National Australia Profit Falls on Rising Bad Debts

April 28 (Bloomberg) -- National Australia Bank Ltd., the country’s biggest by assets, said first-half profit fell 0.9 percent as bad debts rose in an economy headed for its first recession in 18 years.

Net income dropped to A$2.66 billion ($1.9 billion) in the six months ended March 31, from A$2.69 billion a year earlier, as the bad and doubtful debt charge for the half rose to A$1.8 billion, the Melbourne-based bank said in a statement today. Cash earnings, which excludes gains from currency and interest rate movements on the bank’s debt, declined 9.4 percent.

“The bad and doubtful debt charge is a little higher than some would have expected and may head higher,” said Peter Vann, who manages more than $600 million at Constellation Capital Management Ltd. in Sydney. “The outlook from here is really going to depend on the outlook for the economy.”

Cameron Clyne, who took over as CEO from John Stewart on Jan. 1, is also facing pressure in the U.K., where the company’s Clydesdale and Yorkshire banking units are confronting the prospect of the worst recession since the 1930s. National Australia is firing workers and cut its dividend payout by a quarter to 73 cents in the half to weather the downturn.

The bank’s shares, which have rallied 27 percent since March 9, dropped 4 percent to A$21.17 at 10:23 a.m. in Sydney.

Collective provisions increased by A$1.2 billion to A$3.6 billion, while specific provision increased by A$800 million to A$1.3 billion since March 2008. Total provisions as at March 31 stood at A$4.9 billion, reflecting “a downgrade in customer credit ratings across all businesses,” the bank said.

‘Tough’ Conditions

“The fall in cash earnings reflects the tough economic conditions that continued to deteriorate as the half year progressed,” Clyne said in the statement. “We continued to grow revenue while carefully managing costs, but this was offset by increased bad and doubtful debts and higher funding costs.”

In Australia, bank cash earnings rose 7.5 percent, while earnings at its MLC wealth management unit dropped 28 percent. In the U.K., where National Australia owns Clydesdale Bank Plc and Yorkshire Bank Plc, cash earnings tumbled 64 percent.

National Australia remains committed to Clydesdale Bank Plc and Yorkshire Bank Plc, it said in a briefing on March 12. With more than 190 retail branches for Yorkshire Bank and 150 for Clydesdale, the company derives the highest proportion of earnings abroad among Australia’s four biggest lenders.

The bank has already raised more than 86 percent of the funds it plans to source in bond markets for the year through Sept. 30, as it takes advantage of the government’s plan to guarantee wholesale debt sold by lenders in Australia. Its Teir- 1 ration, a key measure of financial health was at 8.31 percent as at March 31.

Improved Margins

Deposits increased 13 percent to A$340.7 billion, mainly due to growth in term deposits, the bank said.

National Australia’s banking cost-to-income ratio, a measure of profitability, improved by 360 basis points to 43.4 percent. Net interest margin, the difference between what the bank earns from loans and pays to depositors, rose 17 basis points to 2.53 percent in Australia, and dropped 52 basis points to 2.14 percent in the U.K.

The bank has shed 205 jobs in the past six months, giving it a work force of 39,783 full-time equivalent workers, it said.

Australia’s economy may already have followed the U.S., U.K., Japan and Europe into its first recession since 1991 after gross domestic product fell 0.5 percent in the fourth quarter.