U.S. HomeSide debacle dogs NAB profit
By CNN's Geoff Hiscock
SYDNEY, Australia -- A disastrous acquisition in the U.S. has seen a 36 percent fall in profits for Australia's biggest bank, the National Australia Bank.
The NAB reported a net profit of just over $1.06 billion (Aust. $2.083 billion) for the year to September, after writing off $1.84 billion (A$3.617 billion) in mortgage servicing rights and goodwill from its U.S.-based mortgage business, HomeSide.
That compares with net profit of $1.63 billion (A$3.2 billion) last year.
The Australian share market took the news in its stride, with NAB shares finishing the day 1.67 percent higher, up 50 cents to A$30.50. The market overall was up 0.5 percent.
Before significant items, which included the HomeSide writedown and the bank's $857 million (A$1.68 billion) profit on the sale of another U.S. asset, Michigan National, the NAB's net profit was up 19 percent to $2.05 billion (A$4.019 billion).
The writedown brought to an end the hitherto stellar performance of the NAB, which has been Australia's most profitable bank for much of the past decade.
Aggressive expansion in U.K.
Its aggressive offshore expansion has seen it buy the Yorkshire, Clydesdale, Northern and Northern Irish Banks in the U.K. and Ireland, and earlier this year there were expectations it would enter into a $50 billion merger with U.K.-based Abbey National.
In the U.S., the NAB bought HomeSide in February 1998 for $1.2 billion and at the time said it would create a new offshore income stream.
But the flurry of U.S. interest rate cuts this year created turbulence in the mortgage servicing business there, forcing the bank to write down the carrying value of HomeSide by $1.75 billion.
Adding to its problems was the discovery in September of an incorrect interest rate assumption in its HomeSide value model. In July it had made an earlier writedown of $450 million.
The HomeSide business is now up for sale.
Conditions to be subdued in early 2002
The NAB decided to quit the U.S. mortgage business after what it said was unprecedented uncertainty and extreme volatility, which reduced future income prospects.
Chief executive Frank Cicutto said Thursday that the bank expected conditions across all markets to be subdued in the first half of the financial year to September 2002.
After that, interest rate cuts and fiscal policy would likely stabilize global activity.
"However, if there is no recovery in the U.S. by mid 2002, then conditions globally could deteriorate substantially," Cicutto warned.
Cicutto said the bank was continuing to look for acquisitions and said the U.K. offered "growth opportunities".
He said the outlook in 2001-02 was for more than 10 percent cash earnings growth.
While the NAB's profit fell because of the HomeSide debacle, its underlying profit of more than A$4 billion added to the strong performance of Australia's banking sector in recent weeks.
Record profits among banks
On November 2, fourth-ranked Westpac Banking Corp reported a record net profit of $965 million (A$1903 million) for the September 2001 year, while third-ranked ANZ Bank also reported a record profit of $953 million (A$1870 million) for the same period a week earlier.
Australia's No. 2 bank by market capitalization, Commonwealth Bank of Australia (CBA), which works to a June 30 financial year, reported an operating profit of $1.22 billion (A$2.26 billion) in August, and said last week it was on track for double-digit growth in 2001-02.
The big four banks rank among Australia's eight largest companies by market capitalization.
However, the size of their profits, coupled with staff cuts and the closure of regional branches in favor of electronic banking, has provoked a consumer backlash in recent years.
This has seen the emergence of several small community banks in regional Australia.
National Australia Bank
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