NAB scrip takes a dip on earnings hosedown

Broking analysts had been positive about NAB's results for the year to September because last year's performance was disappointing relative to Westpac and ANZ, and NAB was set to benefit from major cost-cutting called ``Positioning for Growth".

But NAB management said the result would be at the lower end of its previously stated 8 to 11 per cent cash earnings per share growth range.

Dragging back the results are continued weak equity markets, putting a damper on wealth management operation MLC, while NAB's European banks are struggling in a tough market.

NAB has sought to improve the credit quality of its corporate and institutional banking business by shedding poor quality clients, but the division is suffering from weaker trading income in subdued foreign exchange and money markets.

NAB's chief financial officer, Richard McKinnon, confirmed the fears of many analysts by foreshadowing a revaluation loss of ``not more than $250 million" for MLC in next month's half-yearly result.

NAB has ratcheted down market expectations several times since the ``Positioning for Growth" (PFG) forecasts in the first half of last year.

``Analysts had been expecting earnings at the higher end of management guidance, given they expected a rebound from last year's relatively weaker result and PFG benefits," said Alliance Capital Management's Neil Margolis. ``But they are still within the range."

Analysts yesterday cut their earnings forecasts by 1 to 2 per cent, given the average expectation had been for a 10 per cent rise in cash earnings for the year to September.

Wilson HTM's analyst Brett Le Mesurier, who had predicted 8 per cent, said: ``The disappointing aspects of the business relate to the Europe and wealth management businesses which are struggling to outperform their peers in difficult markets."

As expected, NAB is setting aside more funds to cover a deficit in its Europe defined-benefit pension schemes, where assets have slumped because 80 per cent is invested in the weak markets, particularly the FTSE.

NAB is conducting a mid-year actuarial review of its funds but expects to take a profit and loss charge in the second half of about ##46 million ($119 million), compared to only ##15 million last year.

``There is no black hole in our pension funds," Mr McKinnon said. ``Depending on the outcome of the review, there may be requirements to top up individual funds through individual contributions or a one-off top-up, but these are not expected to be significant."

He raised the prospect that international accounting standards from 2005, which require the pension surplus and deficit to be fully accounted for on company balance sheets, would add to volatility of earnings.

The best news for NAB is emerging from its Australian and New Zealand banking, enjoying market share gains in mortgage lending, while the PFG program appears to be keeping costs generally flat.

NAB has given a strong indication of its commitment to the northern hemisphere market with the recent appointment of John Stewart to run the Europe business.