National Australia confident after strong result

By undercutting rivals on borrowing costs, National Australia Bank boosted mortgage lending. Photo / Getty Images

National Australia Bank's third-quarter profit rose 27 per cent as the country's biggest business lender extended its share of the mortgage market.

Unaudited cash earnings in the three months ended June 30 were about A$1.4 billion ($1.7 billion), the Melbourne-based bank said yesterday. That's up from about A$1.1 billion a year ago.

Alone among Australia's four-pillar banks in posting a loss after the global financial crisis, National Australia, which owns Bank of New Zealand, has rebounded after chief executive Cameron Clyne scrapped fees, undercut loan rates and began an ad campaign featuring a break-up with rivals.

The bank's share of Australia's mortgage market, where four lenders account for about 87 per cent of home loans, has jumped even as demand for credit slumps to the weakest level in three decades.

National Australia "shows no signs of slowing from its above-system growth it has experienced since introducing its discount mortgage strategy", Citigroup analysts led by Craig Williams in Melbourne said ahead of yesterday's announcement.

Notwithstanding "the panic and chaos in world markets, we're very pleased with the group's performance," Clyne told analysts. "Whilst the world may remain uncertain, what we've done is put the bank in the strongest possible position we could possibly put it in. That puts us in good shape to deal with whatever gets thrown at us."

Revenue grew at the bank's personal and business lending units, partially offset by lower revenue from wholesale banking, the statement said.

From October 1, 2010, to yesterday, the bank raised about A$29 billion of term wholesale funding. The bank's 2011 full-year target was to raise between A$25 billion and A$30 billion.

Net interest margin, a measure of the profitability of lending, widened to 2.32 per cent from 2.23 per cent in the half- year to March. The charge for bad and doubtful debts was A$443 million, or 0.41 per cent of gross loans and acceptances, compared with 0.43 per cent on March 31, the bank said.

By undercutting rivals on borrowing costs, Clyne boosted mortgage lending 7.4 per cent in the first half, more than double the gain in total lending, according to a Citigroup analysis of figures released by bank regulators on July 29.

National Australia's outperformance comes amid mounting concern about the profitability of the nation's lenders. Having weathered the turmoil after the collapse of Lehman Brothers Holdings without US-style government bailouts, Australian banks face tumbling demand for home loans after the central bank boosted borrowing costs seven times between October 2009 and November 2010 to 4.75 per cent.

Reserve Bank of Australia Governor Glenn Stevens has cooled household appetite for debt, which more than doubled in the past 15 years as a proportion of disposable income to 155 per cent in the March quarter, RBA figures show.

Credit to home buyers in June increased at the slowest annual pace since 1977, when central bank data began. Australian property prices slid in the second quarter by 1.9 per cent from a year earlier, the biggest drop in more than two years.

Clyne moved to abolish account fees last year, forcing most of his bigger rivals to follow suit and ripping about A$1 billion in revenue out of the system, according to Victor German, an analyst at Nomura Australia.

In November, Clyne increased the bank's benchmark variable home loan rate at a slower pace than rivals, which boosted their borrowing costs by more than the central bank and triggered public anger and accusations by Treasurer Wayne Swan of a "cynical cash grab". Bloomberg