Nab Weathers $1b Loans Blow

THE fall-out from the worldwide credit turmoil is likely to plague the global financial system for the next three years but Australia should narrowly avoid a recession in 2009 even though growth is slowing sharply, National Australia Bank warned yesterday.

With three of its four main operating regions, the US, Britain and New Zealand, either in recession or on the brink of a severe downturn, NAB also underlined just how dependent it was on the Australian economy which accounted for more than 70 per cent of its $3.9 billion profit.

The bank, the country's third-largest by market value, remained confident Australia would avoid the same economic plight as its Western partners, but only just. National growth next year was expected to total no more than 1.25 per cent.

NAB was also optimistic it would raise profits again - although at a lower rate as revenue growth slowed to just 6 per cent - after taking its first hit to cash profits in five years, thanks to a $1 billion write-down caused by its exposure to bad US subprime housing loan investments.

That saw its annual earnings fall by $500 million, or 11 per cent, on last year's $4.4 billion result. The bank was still able to raise its final dividend by 2c to 97c a share, taking the total for 2008 to $1.94 a share.

NAB plans to recycle the payout through its dividend reinvestment program, which will eventually raise an additional $2 billion in capital to strengthen its balance sheet. In doing so, though, it effectively ruled out using the money to bid for Suncorp's banking business, saying it preferred to concentrate on building its more profitable existing operations.

NAB's retiring chief executive, John Stewart, and his successor, Cameron Clyne, also emphasised the resilience of the Australian economy to withstand most of the shocks of the financial storm, helped largely by the recent actions of the Federal Government, the Reserve Bank and regulators. This helped NAB's shares jump $1.68, or 7 per cent, to $24.66. Mr Stewart said Australia had been "ahead of the game" with its decisions to stimulate spending by nearly $11 billion, guaranteeing all retail deposits and bank funding and by cutting interest rates.

The latter move helped reduce home loan costs to 8.3 per cent from the highs of 9.6 per cent.

Mortgage rates are expected to fall even further in coming months with NAB predicting that the RBA will slash the current cash rate of 6 per cent to as low as 4.5 per cent over the next 12 to 18 months to prevent the economy slipping into recession.

Nonetheless, NAB admitted there had been a "marked softening" in domestic demand. "With any luck, we'll stave off a recession, [although] it might feel like a recession," Mr Stewart said. The bank, however, expects lending growth to slow, having made plans to raise between $14 billion and $19 billion from international sources to meet its lending needs to customers.

Only $5 billion of that will fund new growth. Last year it sucked in $28 billion, albeit at a much higher financing cost.

Deteriorating financial conditions prompted NAB to raise its total bad debt charge to $2.49 billion - $1.69 billion higher than last year, of which $1 billion was accounted for its specific US loan exposures.

The remaining $690 million included $200 million for sour loans it expected to emerge over the coming months. And while NAB did not expect to take any further large charges against its toxic subprime investments, it revealed that their market values were now worth $2 billion less than their book price of $18 billion.

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