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Tuesday 9 November 1:43 PM
Australia's NAB Profit Result Won't Appease Investors
MELBOURNE (Dow Jones)--National Australia Bank Ltd.'s (NAB) annual profit result Wednesday won't provide much comfort for investors, with a turnaround still some way off for the nation's biggest bank. "The only thing that seems likely from NAB's fiscal 2004 result is there won't be much good news," investment bank Deutsche Bank told clients. NAB is the last major Australian bank with a September 30 balance date to reveal its annual performance and it will be the only one to suffer a profit reverse, despite a booming domestic housing market. A Dow Jones Newswires survey of six analysts predicts annual net tprofit will fall 4% to A$3.62 billion from A$3.77 billion a year earlier. But the fall in closely-watched cash earnings is expected to be more pronounced, with a fall of 14.5% to A$3.48 billion. This profit measure, which strips out changes in wealth management valuations, is acknowledged by the sector and analysts as a better indication of performance. In July, NAB warned second half cash earnings would be 10% to 15% lower than the first six months, implying a full year range of A$3.42 billion to A$3.51 billion. NAB also provided guidance that its final dividend will be flat at around 83 cents a share. Analysts predict the result will be squeezed by margin compression, pension costs, weak financial market revenue and increased compliance costs. Coming under particular focus will be NAB's flagship Australian retail banking franchise. This operation appears to have lost market share in loans and deposits due to the fallout from the foreign currency trading scandal that cost a number of executives their jobs earlier in calendar 2004. In July, NAB admitted margins are under pressure as it make aggressive moves to retain customers, adding a recovery in Australia will be at least a year off. Adding further pressure is the likelihood that new chief financial officer Michael Ullmer has gone through the balance sheet and could announce some A$600 million worth of writedowns in the second half, mainly in relation to capitalized software. NAB still remains well ahead of its three local bank rivals in terms of size and earnings, with a market value of A$43.6 billion that is more than A$3 billion higher than its nearest rival. The smallest of the big four, Westpac Banking Corp. (WBK), Monday said annual net profit rose 16% to A$2.54 billion. Australia & New Zealand Banking Group Ltd. (ANZ) late October said earnings rose 20% to A$2.82 billion and Commonwealth Bank of Australia (CBA.AU), the second biggest bank, reported a 28% earnings gain to A$2.57. CBA is the only big bank to end its financial year on June 30, like many other industrial and resource majors.
While chief executive John Stewart will try and use NAB's results to focus investor attention on the longer term fixes underway, shareholders who have already been sorely tested from the events of the past year are looking for the timing of any recovery. "Whilst we are hopeful of a better 2005, we believe it is more likely that NAB's operational issues and structural fix will take longer to achieve, potentially pushing out its recovery story into 2006 and beyond," said brokerage firm and investment bank UBS. Given loss of momentum in its core Australian retail franchise amid a slowing housing market, and the distraction of implementing a new operational structure, Stewart has so far warned no real profit improvement is expected in the first half of fiscal 2005. UBS analysts expect future earnings guidance, if any, to be particularly cautious. "We cannot rule out the possibility of further disappointments in 2005," it told clients in a note. Elsewhere, uncertainly remains over NAB's ability to maintain dividend payments at current levels, given regulators have put the bank on a tight capital leash until confidence can be rebuilt in its trading systems. NAB's Stewart is also expected to use the annual results to present a revival strategy for the underperforming U.K. operations, including a possible sale of the bank's two Irish subsidiaries. Three banks are speculated to have lodged bids for Northern Bank in Belfast and National Irish Bank in Dublin. These are Lloyds TSB Group PLC (LYG) and HBOS Plc (HBOS.LN) and Dutch-based Rabobank Group (RBK.YY). Both Lloyds and HBOS declined to comment. A spokesman for Rabobank didn't respond to queries. Analysts say the sale of the two banks could raise around A$2.5 billion, with funds used to reinvest in the two remaining U.K. bank franchises and provide a much needed-boost to capital back home. While it will be appealing for Stewart to tell investors NAB has entered into exclusive talks for the sale of the Irish operations, he has maintained that NAB won't sell the banks if offers fall short of expectations. NAB has warned a recovery of its entire European operations will take two to three years given the combination of slowing system credit growth and declining net interest margins creates a dual financial headwind. Even with a swag of high quality management and board appointments, brokerage firm CSFB continues to believe that it is too early to call a "turnaround" story for the bank. CSFB says its caution toward the stock stems from NAB's relative lack of earnings growth compared to the peer group; downside earnings risk to consensus estimates; the relatively constrained capital position; and "its relatively demanding share rating despite strategic uncertainty at this juncture". One bright spot in an otherwise lackluster report is expected to be the bank's wealth management operations, with full year earnings forecast to rise strongly due to soaring domestic equity markets and improving insurance sales.
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