National Australia Bank's misdeeds hit profit but dividend holds firm

By Paulina Duran

SYDNEY (Reuters) - National Australia Bank (NAB) posted a 14 percent fall in annual cash earnings on Thursday as the country's fourth-largest lender grapples with the costs of compensating customers and improving compliance following revelations of wrongdoing.

The lender maintained its high dividend but the lower-than-expected profit underscored the costs NAB and other major Australian banks have incurred since a public inquiry exposed major flaws in their governance and accountability.

Cash earnings came in at A$5.7 billion ($4 billion) for the year ended Sept. 30, compared with a record A$6.64 billion over the same period last year and below an average estimate of A$5.76 billion in a Reuters poll of six analysts.

Australia's biggest business lender said cash earnings at its business and private banking division, its largest contributor to earnings, fell 3.6 percent during the second half to A$1.4 billion, as lower margins hit.

Profit at its consumer banking business also fell, hit by higher short-term funding costs and mortgage competition.

"The business bank is one of NAB's strengths in this environment - relative to the other banks with higher exposures to housing - so this is a big surprise," said Hugh Dive, chief investment officer at Atlas Funds Management.

Revelations of widespread malfeasance have put Australia's largest financial institutions under unprecedented scrutiny, raising the spectre of costly legal battles and tougher regulation.

NAB said it had recognised A$360 million in customer-related remediation charges in the second half, including compliance costs and refunding customers it had overcharged.

It has also slashed executive pay, and forced about 300 staff to leave as a result of internal investigations into misconduct since the inquiry began hearings in February.

PAYOUT

Despite its lower profit, the Melbourne-based lender announced a final dividend of A$0.99 per share for the half, maintaining its full-year payout at A$1.98 per share.

Investors initially cheered the move, pushing NAB shares 1 percent higher in morning trade, but the price fell off in the afternoon to be 0.40 percent higher at 0428 GMT, slightly ahead of the wider market.

"We think there's a risk NAB will have to cut their dividend," Dive said.

"They are paying most of their profits back and not building any capital so we don't think they can maintain such a high payout in this environment."

NAB shares are down 12 percent since February, roughly in line with peers Commonwealth Bank of Australia and Westpac Banking Corp. Australia and New Zealand Banking Group has fallen more than 7 percent in the same period.

Chief Executive Andrew Thorburn, who admitted last month NAB had "let customers down", said the bank would offer a 1.5 percent discount to investors who chose to reinvest their dividends into shares.

It had spent A$12 million on progressing the separation of its wealth management unit, MLC, and was still targeting to offload it via an initial public offering or a sale by the end of 2019.

"We are building capital discipline. We've skewed our capital allocation investment dollars in growth where we have a competitive advantage," namely business and private banking, Thorburn told analysts.

NAB reported an increase in its minimum capital ratio to 10.2 percent as of Sept. 30, short of the government mandated 10.5 percent by 2020 and behind its three big peers.

Charges for bad loans fell three percent but provisions for future losses increased to A$3.72 billion in anticipation of possible losses from declines in house prices and as a portion of its interest-only loans start maturing.

Arrears were also 5 basis points higher during the half.

($1 = 1.4142 Australian dollars)

(Reporting by Nikhil Kurian Nainan in Bengaluru and Paulina Duran in Sydney; Editing by Stephen Coates)