So is the only way up for John Stewart and his high-priced lads and
lassies at the National Australia Bank? Has the nadir in earnings
declined been plumbed, and does a rebound await?

Big questions, and judging by reaction to today’s profits, true believers about the NAB are back in force.

The NAB today reported cash earnings down by 15% to $3.46 billion,
while net profit attributable to shareholders eased to $3.17 billion, a
fall of nearly 20%.

Certainly Stewart is confident the turnaround can and will happen – as AAP reports here. The leap of faith approach to banking might yet prove to be the best
and only option for the NAB.

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Cost cutting is out as an option. The competition in the ANZ, Westpac
and St George are already pouncing on unhappy customers. These three
are now much further down the track with rising investments
in retail and small business banking, good cost controls and faster
than system revenue growth.

So has the bottom been reached, yet? Nope, not without a two billion
dollar kick start from selling the Irish banking businesses, and making
something more positive from the equally faded British banks.

If that isn’t delivered within the next two and a bit months you can
expect another big sell-off in the NAB shares and further management

The annual meeting is at the end of January, the news has to be out before then.

But the market obviously wants to believe, otherwise why would
investors chase NAB shares higher, up 54c in early afternoon trading to
$28.39. It had been as high as $28.50.

Perhaps they were reassured the 83c a share final dividend would be
paid. A lot of dividend washing and franking credit tricks are based on
that assurance.

But even with that dividend payout there would have been good news for
shareholders and other investors, relatively speaking. Relative, that
is to the Commonwealth Bank.

The NAB is paying a final of 83c, unchanged from the interim. That
makes a total of $1.66 for the year. Not bad in absolute terms and
second to the CBA’s almost ‘bribe’ of $1.83c.

In percentage terms, the NAB’s payout ratio is just over 74%, the CBA’s
93%. Almost a ‘bet the bank’ sort of payment to shareholders from CBA
management wanting everyone to be happy while the huge cost cutting and
spending goes on revamping the Retail division.
That cost cutting is hurting morale everywhere in the CBA as readers of
the Wednesday first sealed section would have discovered.
But the NAB’s problems were home-grown. While currency did have an
impact, it is almost a permanent variable. It goes up, and down and
impacts on the bank accordingly.

Everything that could go wrong went wrong for the NAB in the year to September, and it was all its own work and fault.

The forex options debacle, costly in terms of losses, personnel,
directors and added regulatory oversight was not the great crime, it
was how the previously signed off strategy of Frank Cicutto and Charles
Allen came to a screaming halt.

Second half expenses rose by more than $300 million caused in part by
currency, regulatory and management changes, and slower overall revenue
growth from the business.

The bank’s Cost to Income ration tells the story. Up from 48.4% to
54.1%, when the better performing rivals at ANZ, St George and Westpac
all lowered their cost to income rations to 48% or less, without any

How did they do it, by growing revenue, especially in the small and
medium business area, the area the NAB had abandoned deliberately for
fear of a sharp downturn in the economy.

The other banks also withstood the slow down in housing, especially in
the investment area and in NSW. How? By having better motivated
employees, being more agile, having their eye on the ball, and not
falling for the cost cutting mantra that Frank Cicutto had given the
NAB over the past couple of years, and which still dominates the
Commonwealth Bank of David Murray.

This is what was in Crikey in May about the way the NAB has lost
control of costs – NAB’s failures exposed:

“So what how has the NAB gone? In March 2003, the Cost To Income ratio
was 47.3% with a major factor the underperformance of the MLC-based
wealth management business because of the slump in equity markets. Six
months later by September 2003 and the Cost to Income Ratio had risen
to 49.6%, despite a rebound in equity markets helping wealth management
and improving income levels. Move forward to March this year and
despite the higher equity markets and the housing boom, problems
elsewhere in the bank, especially in Europe, drive the Cost to Income
Ration up to 50.9%”.

This is the real story from the NAB, the rot had already set in and the
board, including The ‘sainted’ Catherine Walter, had done nothing to
control or start reversing this trend.

It is a sign of complacency. No wonder chairman Graham Krahe, and others have or are going.

So how has the big bank cartel gone in 2004?

Well, the NAB earned $3.4 billion (on a cash basis); the ANZ, $2.6; St
George more than $717 million; Westpac, just over $2.5 billion
and CBA around $2.5 billion (before cost impact of revamp). That’s
around $11 billion. And if you include Suncorp, Bendigo and a couple
of tiddlers, it gets to $12 billion.