National Australia Bank Ltd (ASX: NAB) today reported a 9.8% decline in cash profit to $5.184 billion for the 2014 financial year. The bank said the result was influenced by $1.5 billion in provisions and impairments, alongside a tax policy change announced earlier in the month.
Indeed, the bank's operating income rose 1.9% year-on-year but it was its operating expenses which hurt the bank's bottom line, rising to $10.18 billion from $8.41 billion. The bank was able to offset the 21% rise in operating expenses with a 54.7% drop in charges for bad and doubtful debts, which amounted to $877 million for the year, down from $1.93 billion in 2013.
Excluding the adjustments for cash earnings announced on October 9, prior period UK conduct charges relating to payment protection insurance and interest rate hedging products actually rose 12.4%.
On a statutory basis, NAB's result didn't look so bad either with profit attributable to owners falling just 1.1% to $5.295 billion. Its Basel III common equity tier 1 capital ratio climbed to 8.63%, from 8.43%. NAB said it will target a CET1 ratio between 8.75% and 9.25% by January 2016.
As a result of its higher capital adequacy ratio and lower earnings, NAB's already lacklustre profitability fell hard. Cash return on equity fell to just 11.8% from 14.1% and its net interest margin fell to 1.93%, from 2.03% a year earlier.
NAB's cash earnings per share were $2.16, in line with expectations but down 11% for the year. It announced a final fully franked dividend of $0.99 per share, taking the full year payout to $1.98.
CEO Andrew Thorburn said the Australian Banking division, where revenue grew 1.8% excluding markets and treasury income was "in good shape", but said it is "disappointing to record a full year result that includes $1.5 billion after tax in UK conduct provisions and other impairments."
He said the bank has made good progress on accelerating an exit from the UK and the US. "In July we announced the partial sale (£625 million) of the NAB UK CRE portfolio and in October began the sale process of Great Western Bank with the IPO of a 31.8% stake."
Mr Thorburn said the Australian and New Zealand businesses will remain the priority moving forward. He also said public markets could provide a way out of the UK: "In relation to exiting UK Banking this means we are now examining a broader range of options including those provided by public markets."
Should you buy, hold, or sell?
In early morning trade NAB shares drifted slightly higher but despite management's best intentions, the fact is there's still a long way to go before NAB becomes the bank it wants to be. The latest dividend puts the bank's shares on a grossed-up annual yield of 8.2%, which is very tempting in the low interest rate environment.
However, if you're a long-term investor like I am, I suggest steering clear of NAB shares. Especially whilst they're trading at such high prices (they're definitely not cheap). It might also be worth waiting until the bank can sell more of its stake in listed US subsidiary, Great Western Bancorp Inc (NYSE: GWB) and provide more colour on the possible sale of its two UK banks, Clydesdale and Yorkshire.
