Profits: NAB Confident, Macquarie Gloomy

The Reserve bank delivered the bad news to the banking sector yesterday, no rate cut and no chance to rebuild profit margins by hanging onto all or some of the widely expected 0.25% cut.

Now we will see more talk from the banks about pain, job losses and the like.

And, judging from yesterday's trading updates from the National Australia Bank (a solid first quarter) and Macquarie (a big ouch, job losses and a fall of 25% in full year earnings for the March year), the news in the next couple of weeks is going to be confusing as the bigger moaners at the ANZ and Westpac grapple with slower revenue and higher funding costs.

Westpac and the ANZ produce their trading updates in the next week, while the Commonwealth Bank will reveal its interim results a week today.

The NAB revealed a modest 7.7% increase in first-quarter cash earnings and revealed that it could get rid of its troubled UK operations after a review.

NAB reported a first-quarter cash profit of $1.4 billion, up from $1.3 billion a year ago, slightly below an average forecast of $1.45 billion from analysts.

The bank said its statutory unaudited net profit for the first quarter of fiscal 2012 was approximately $1.6 billion.

At December's annual meeting the bank forecast a challenging 2012 with business and consumer sentiment subdued, credit growth low and revenue slow to pick up.

That's an affliction hurting all banks this financial year.

They will be hard-pressed to match the record 2010-11 financial year which saw them earn a record $25 billion between the big four.

Last year Australia's big four banks together made a record $25 billion in profits but credit growth has fallen to the lowest level since the 1970s as households increase savings and corporates pay down debt, forcing banks to focus on cost controls.

NAB chief executive Cameron Clyne said in yesterday's statement that the bank's funding costs had risen, resulting in a narrowing of its so-called net interest margin.

The bank also estimated bad and doubtful debts to $545 million for the quarter, blaming the weak UK economy for the increase (no wonder the review of those operations).

"Higher deposit and wholesale funding costs, softening credit growth and fragile economic conditions continued to be key characteristics of the operating environment in most of the regions in which NAB operates,'' Mr Clyne said in a statement.

NAB's net interest margin, a key driver of profitability, was 2.19% in the three months to December, down from 2.28% in the previous corresponding period.

The bank said it had revenue growth in its wholesale banking operations, and, to a lesser extent, its wealth management businesses, MLC and NAB Wealth.

Higher funding and deposit costs offset volume growth in its business and personal banking divisions, resulting in flat revenue.

Revenue fell in NAB's UK business, and the bank announced it will conduct a strategic review of the business.

"It is clear that the UK economy is likely to experience a much longer period of subdued growth with the ongoing sovereign debt crisis in the eurozone and the continuing austerity program by the UK government,'' Mr Clyne said.

"We will work with UK management to appropriately reposition its business mix and structure for the changed economic environment and improve returns.''

The outcome of the review was expected to be announced by May, he said.

NAB shares fell 93c or 3.8% yesterday to $23.25, with most of the fall coming after the RBA rate decision.

But while it's getting tougher in commercial banking, in the once glamorous area of investment banking, life seems grim, if yesterday's update from Macquarie Group is a good guide (and it is).

Macquarie warned of a worse-than-expected 25% fall for the 2011-12 financial year as the weak financial markets hit its trading and investment banking businesses.

The bank is also targetting a 10% drop in staff numbers in a key area, after cutting hundreds of jobs here and offshore in the past year.

Chief executive Nicholas Moore told analysts that the bank has taken out $300 million in operating costs in Macquarie Securities and Macquarie Capital, saying they are being "severely impacted by macroeconomic conditions".

Around 1,000 jobs have gone in the past year, with hundreds more to follow, judging by comments yesterday from the bank's management.

The news saw Macquarie shares fall nearly 5%, or $1.28 to $24.85.

Including yesterday's fall, Macquarie shares are down more than 40% over the past year (the NAB's shares are off around 7% in contrast), compared with a 12% fall in the overall market in the same time.

Separately, Macquarie Group said it would start a buyback of 10% of its shares next financial year.

The buyback will be subject to regulatory approval and regulators will want to make sure the cost of the buyback won't reduce the bank's capital base or liquidity reserves.

"Global economic uncertainty has deepened since October 2011, with substantially lower levels of client activity in many markets," Macquarie said in a trading update.

Macquarie had missed estimates previously with a 24% fall in first-half profits to $305 million.

With its key trading and investment banking business struggling, Macquarie had said it expected earnings in the year to March to be lower than last year's net profit of $956 million.

Thomson Reuters estimates showed a consensus net profit forecast of $840 million or a fall of 12% for 2011-12, half the decline Macquarie estimated yesterday.

If the 25% fall happens, Macquarie could earn around $755 million in the year that ends on March 31.

Second-half net profit was tipped to come in 35% higher than the first half's $305 million, but even that won't be as good as the size of the rise looks.

While the expected increase between the first and second halves is principally due to a significantly-improved contribution from the bank's profit driver, FICC (Fixed Income, Currencies and Commodities Group) there will be the one-off cash injection from MAp cash return.

Both will offset a weaker contribution from Macquarie Securities, Macquarie said.

And that division is where the 10% staff cut will happen, with added job losses among staff in support groups.

Macquarie's headcount is about 460 people fewer since the end of September, with half of the positions lost in Australia. Over the past year, the bank has cut about 1,000 jobs around the world.

Macquarie's full-year results are due on April 27.