National Australia Bank (NAB) has quashed hopes that bad debts may have peaked for major Australian banks after posting a profit plunge on a 50 per cent rise annual bad debts.
Australia's largest business lender reported a 42.9 per cent fall in net profit to $2.589 billion for the year to September 30 after its bad debt charges surged to $3.8 billion.
Exposures to troubled corporates and large businesses were mostly to blame, but whether small to medium enterprises (SME) would be the next to suffer is uncertain, chief financial officer Mark Joiner said.
"I think we will see a rise in SME (impaired assets)," he said, adding that the magnitude of the rise would depend on their responsiveness to improved economic conditions.
Revenue lifted by 9.7 per cent to $16.9 billion, driven mostly by the Australian banking business and a strong performance in nabCapital Global Markets and Treasury.
NAB's result was in line with expectations but it sparked a sell-off across Asian equity markets on increasing concerns over the pace of the global economic recovery, IG Markets analyst Ben Potter said.
NAB's stock fell 87 cents, or 2.83 per cent, to $29.83.
Bad debts for NAB peaked in fiscal 2009 in March and the next five months will be key to determining when they will peak across the entire cycle, Mr Joiner said.
This dampened analysts' hopes that the current bank reporting season would signal when the peak will be reached.
Bad and doubtful debts are the biggest drag on bank earnings during the first two years after a market downturn, and 12 months ago NAB's had tripled to $2.48 billion which pushed cash earnings down 10.7 per cent to $3.919 billion.
On Wednesday NAB said its fiscal 2009 cash earnings fell 1.9 per cent to $3.841 billion and the only business units to see cash earnings rise were the retail banking arm and nabCapital.
NAB said it would run its business to optimise balance sheet strength rather than earnings amid regulatory uncertainty.
Shareholders will feel the pain with the dividend payout ratio stuck at 73.6 per cent of profits to preserve capital, Mr Joiner said.
The payout ratio fell from 80.6 per cent in fiscal 2008 to 73.6 per cent in its 2009 fiscal year.
NAB used reserves instead of earnings to pay a final dividend of 73 cents per share, fully franked, leaving total dividends for fiscal 2009 at 146 cents per share - a 24.7 per cent fall on the previous year.
Mr Joiner said NAB hoped there would be "room to grow into the capital base and move ratios lower when the dust settles on the regulatory debate".
NAB and other banks currently face a risk that the prudential regulator, the Australian Prudential Regulatory Authority (APRA), will introduce higher regulatory capital and liquidity levels.
Chief executive Cameron Clyne told analysts the bank could not predict an outcome on the issue and would hold more capital as a buffer against this risk to its tier 1 capital ratio.
"Whilst we've landed at 8.96 [per cent] we can see a number of headwinds which could see us settling at 8.5," he said.
In the meantime, Mr Clyne says the federal government's wholesale funding guarantee should remain in place as long as the bank could continue raising capital without it.
"I think that as long as that is occurring you're best off leaving the guarantee in place because if things become suddenly turbulent again and there is a freeze in markets then you can re-activate the guarantee very quickly rather than removing it," he said.
NAB was heavily reliant on the guarantee during the first half of fiscal 2009 to help complete some of the $8 billion in capital raisings for the year.
In fiscal 2010 it hopes to make the "vast majority of our issuance in the unguaranteed format," Mr Joiner said.
New capital will be used to bed down recent acquisitions rather than hunt for more, with NAB's appetite for offshore assets "pretty limited until we see a normalisation in these markets", Mr Clyne said.
NAB said in June it would pay $825 million for wealth manager Aviva's Australian arm.
The transaction will be completed in two weeks, Mr Clyne said.
© 2009 AAP
