News: NAB BREAKINGVIEWS-NAB's capital loss points to dividend challenges

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Jun Yang HONG KONG, Feb 6 (Reuters Breakingviews) - The days of Australian-bank giveaways are numbered. Rising funding costs, intense competition and tougher capital rules threaten the ability of lenders like National Australia Bank (NAB), which reported earnings on Monday, to be generous with dividend payouts, a key attraction of an otherwise unimpressive sector.

NAB, among the four largest Australian banks by assets, said its common equity Tier 1 ratio dropped 30 basis points to 9.5 percent as of Dec. 31 from three months earlier, mainly because of a dividend payout for the prior accounting year. Earnings for the fiscal quarter ended Dec. 31 were lackluster: while revenue increased by 1 percent year-on-year, costs grew faster at 5 percent.

Big Australian banks currently pay out handsome dividends. NAB's dividend yield exceeds 9.3 percent, compared to 3.3 percent for the Thomson Reuters Global Banking Services Index and 5.5 percent for the benchmark S&P/ASX 200 Index. The gauge for the other three of the "four pillars" of the Australian banking sector ranges from 7.4 percent to 8.4 percent. The quartet paid about 80 percent of earnings in dividends in their last fiscal year.

That seems unsustainable. Compared to their Asian peers, Australian banks' funding relies more on the market, where yields are rising, than cheap deposits. Competition to make domestic loans may intensify now that all the major banks are looking inward after not-so-successful ventures overseas. NAB said its net interest margin in the October-December quarter was "broadly stable" without giving a figure, but the metric has been in decline in the past few years.

NAB's regulator, the Australian Prudential Regulatory Authority, wants to make banks' capital levels "unquestionably strong". But even after selling new shares and divesting non-core businesses, the four big Australian banks may still have a capital shortfall amounting to billions of dollars. Life for their investors has been good – and probably too good.

On Twitter http//twitter.com/JYang_in_HK

CONTEXT NEWS - National Australia Bank on Feb. 6 reported a 1 percent fall in earnings for the fiscal first quarter ended Dec. 31, as costs grew faster than revenue.

- NAB also said its Tier 1 capital ratio fell to 9.5 percent as of Dec. 31 from 9.8 percent a quarter earlier after it paid a final dividend. The bank said it was considering issuing Tier 2 securities to beef up its capital position, subject to market conditions.

- Loans overdue for 90 days or longer and impaired assets grew to 0.9 percent of gross loans at the end of December from 0.85 percent three months earlier.

- NAB and other Australian banks report "cash earnings", which have been stripped of contributions from discontinued operations, as well as one-off and other non-cash items.

- As of 1:42 p.m. in Sydney (0242 GMT), NAB shares were up 1.3 percent at A$30.70 ($23.60).

- For previous columns by the author, Reuters customers can click on [YANG/]

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