By Chris Becker

The fourth division of Australia’s Megabank – the National Australia Bank (ASX:NAB) today announced full year earnings, with net income declining by some 22% to just over $4 billion (or what Disney just paid for Star Wars….)

This is the first drop in banking profit since 2009 for any division of Megabank, although it must be noted that underyling cash profit increased – the real reason for the disappointing bottom line result is a very large increase in provisions for bad debts. Thankfully for Australian shareholders, those bad debt provisions are for its UK bank operations, not domestically, with charges for bad and doubtful debts increasing to $539 million.

Here’s the quick take from the Bloomberg:

FY net income came in at $4.08B vs $4.83 estimated – well below the bottom range of estimates

Excluding the provisions, net income was $5.43B vs estimated $5.5B – so not as big a surprise

Bad and doubtful debt charges are up 31% to $1.48B

FY net interest margin (NIM) is at 2.11% falling 11 basis points in the last six months

Tier 1 capital ratio is at 10.27% vs 9.7% one year ago

Return on Equity (ROE) fell 1.5% to 13.5%, the lowest of Megabank’s divisions

You can see from the chart above that net interest margin is steadily declining – even as the bank holds back on some of the RBA cuts and is gaining a larger share of its funding from domestic deposits instead of the expensive foreign money markets. Further, the net income is now well below the FY2007 peak, even as book value continues to climb and dividends per share also recover, but not yet above the 2008 peak:

Is there any wonder why NAB’s share price has trailed the other divisions?

This result has been spun as solely because of a “weak UK economy”, with most analysts expecting further writedowns and higher charges to follow, notwithstanding the recent solid GDP print for the UK economy, mainly due to the one-off Olympics euphoria.

But the reality is at home, private sector credit growth has been anemic – just over 4% annualised – even with emergency style rate cuts by the RBA – we’ll see the September figures very soon today.

Chris Becker is an investment strategist at Macro Investor, Australia’s leading independent investment newsletter covering stocks, trades, property and fixed interest. A free 21-day trial is available at the site. You can follow Chris on Twitter.

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