National Australia Bank delivered another solid performance for first-quarter fiscal 2014 with a 7% increase in unaudited cash profit to AUD 1.55 billion, modestly below consensus of AUD 1.58 billion. Earnings for the major bank again benefited from a sharp fall in bad debts, down 23% to AUD 324 million for the quarter.

Moderate loan growth and lower net interest margins restricted income growth to just 1%. The net interest margin was slightly lower because of increased competition on loans and lower earnings on the bank’s free funds. As expected solid growth in the mortgage book was offset by lower lending balances during the quarter. The 3% increase in operating costs was disappointing, but the underlying uplift was a more respectable 1% when allowing for foreign exchange movements. Higher expenses included salary increases, bonus payments, and increased depreciation and amortisation charges. Asset quality improved across the group and, pleasingly, the troublesome U.K. businesses continue to recovery.

The softer-than-expected revenue growth and lower net interest margin are offset by positives of significantly lower bad debts, improved asset quality and good organic capital growth.  Longer term, we expect solid revenue growth and tight cost control to feature. We are confident the restructuring and IT investment will bear fruit with a progressively lower cost-to-income ratio to be achieved during the next five years.