National Australia Slumps to Six-Month Loss on Debts

Oct. 28 (Bloomberg) -- National Australia Bank Ltd., the country’s biggest lender to businesses, slumped to a fiscal second-half loss after charges for bad debts climbed and the company set aside funds for a tax settlement in New Zealand.

The net loss of A$75 million ($69 million) in the six months ended Sept. 30 compared with a profit of A$1.85 billion in the year-earlier period, the Melbourne-based bank said in a statement today. Cash earnings, which strip out one-time items, rose 8 percent to A$1.81 billion.

Chief Executive Officer Cameron Clyne, who bought insurance, mortgage and brokerage assets since July, said he may consider reducing capital buffers that protect against future loan losses as the economy recovers. Australia’s central bank this month became the first among Group of 20 nations to raise interest rates since the global financial crisis began.

“The outlook is suggesting the worst is over,” said Hugh Dive, who helps manage about $3 billion at Investors Mutual Ltd. including National Australia shares. “Once bad debts start coming off, if they can maintain market share with a similar margin, we’ll see expanded earnings going forward.”

National Australia shares fell 0.6 percent to A$30.53 at 11:17 a.m. in Sydney. The shares have advanced 46 percent this year as analysts forecast an earnings rebound after the country dodged the global recession and the jobless rate unexpectedly fell in September.

‘Robust’ Prospects

Second-half net interest income, or revenue from borrowers minus interest paid to depositors, rose to A$6.19 billion from A$5.84 billion, National Australia said.

“Near- to medium-term prospects for sustainable growth look robust,” Ben Potter, research analyst at IG Markets, said in a note today. “We would expect some upwards revisions to price targets.”

Charges for bad and doubtful debts rose to A$2 billion in the second half from A$1.76 billion a year earlier. The lender also set aside A$542 million for a tax bill after New Zealand authorities reviewed structured finance transactions it carried out.

It may not be possible to judge whether bad debts have peaked for another six months because Australia’s economy is still supported by a government stimulus, National Australia executives said during a conference call today.

‘Somewhat Cautious’

“There are a number of positive signs but you also need to be somewhat cautious,” Clyne told reporters in Sydney. Asset quality “might be stabilizing, but there are still a number of issues to be worked through.”

National Australia said it may reduce its Tier 1 capital ratio, a measure of the lender’s ability to withstand future losses, “when conditions become more predictable.”

The bank’s Tier 1 ratio climbed 65 basis points from March to 8.96 percent on Sept. 30. A basis point is 0.01 of a percentage point. National Australia will pay a final dividend of 73 cents, down from 97 cents a year ago.

Australian banks can absorb possible defaults by businesses and households and losses may be limited to 2 percent of outstanding loans, or A$33 billion of A$1.65 trillion in total credits as of March this year, the International Monetary Fund said in an Oct. 14 report.

The nation’s top four banks may amass as much as A$18 billion of surplus Tier 1 capital before the end of next year, Credit Suisse AG said in an Oct. 14 report. The banks may return A$15 billion of that to investors through share buybacks as asset quality improves and bad debts ease, Credit Suisse said.

Acquisition Spree

National Australia in September bought Aviva Plc’s Australian wealth advisory and life insurance units for A$825 million. In August, the bank agreed to purchase the mortgage business of Challenger Financial Services Group for A$385 million. A month earlier, it said it would buy most of Goldman Sachs JBWere Pty’s private brokerage for A$99 million.

Full-year profit fell as bad debts swelled and earnings slumped in the recession-hit U.K., where National Australia runs Clydesdale Bank and Yorkshire Bank. Net income dropped to A$2.59 billion from A$4.54 billion.

National Australia was expected to report annual profit of A$4.18 billion, according to the average of seven analysts’ estimates compiled by Bloomberg.