National Australia Bank is on track for another record cash profit, but the bank says higher funding costs have begun to hit its revenue.
Demand for loans remains weak in Australia, the lender said, while a prolonged recession in the United Kingdom has prompted a review of its underpeforming business there.
But NAB said it had no plans for major job cuts, despite similar moves from some of its competitors.
The bank’s unaudited cash earnings in the three months to December 31 were $1.4 billion, up from $1.3 billion in the same period the previous year.
The result came in just below market expectations, sending its shares lower, down 90 cents, or 3.7 per cent, at $23.37 at 1552 AEDT.
But NAB is on track to beat the previous year’s first half cash profit of $2.67 billion.
However, chief executive Cameron Clyne said increased wholesale funding and deposit costs had reduced NAB’s revenue by about $80 million in the three months to December.
“Higher deposit and wholesale funding costs, softening credit growth and fragile economic conditions continued to be key characteristics of the operating environment in most of the regions in which NAB operates,” he said on Tuesday.
NAB’s net interest margin, a key driver of its profitability, was 2.19 per cent in the three months to December, down from 2.28 per cent in the prior six months.
Six basis points of that fall was due specifically to higher funding costs, chief financial officer Mark Joiner said.
Higher funding costs are a key reason given by the banks when raising the possibility of not passing on cuts to the cash rate by the Reserve Bank of Australia.
But NAB promised it would continue to offer the lowest standard variable home loan rate of the big four banks in 2012.
Putting further pressure on NAB’s interest margin is ongoing weak demand for credit from consumers and businesses.
“At this stage we anticipate credit demand to remain relatively subdued, particularly over the next quarter or so,” Mr Clyne said.
But a disciplined approach to costs in recent years means the bank has no plans for cost cutting initiatives such as job cuts.
“We’re not flagging any major cost initiatives,” Mr Clyne said.
Meanwhile, NAB’s 300-branch UK business remained a drag on the group, suffering a fall in revenue over the December quarter and a rise in bad debt charges.
With the UK likely to experience a prolonged recession, the time was right for a review of the business, Mr Clyne said.
“In terms of options, we are not ruling things in or out today,” he said in response to questions about whether the review will lead to a sale of the business.
“The objective is clear to improve the return of the business.”
The bank expects to report the findings of its review by May.
