2nd UPDATE: National Australia Bank 1st Half Cash Profit Rises 8%

National Australia Bank Ltd. (NAB.AU) on Thursday recorded an 8% improvement in its first half cash profit, boosted by a fall in bad debt charges and improved profit in its business banking and wealth management arms.

The group also said it continues to assess opportunities in the U.K. but gave no update on what it may do in terms of its A$13.29 billion bid for AXA Asia Pacific Holdings Ltd. (AXA.AU) other than that it is still looking at all its options after the Australian Competition & Consumer Commission said last month it would block the deal.

Net profit for the six months to March 31 fell to A$2.095 billion from A$2.664 billion a year before, reflecting "accounting volatility from significantly lower movements on financial instruments" but the group's more closely watched cash profit--a smoothed measure--rose 8.2% to A$2.19 billion from A$2.03 billion a year before. The result was in line with expectations.

But like its peers, NAB's cash profit improvement was underpinned by a drop in new bad debt charges rather than significant top line growth. Investors have marked down the sector dramatically in recent days amid concern about future growth avenues, following strong gains in the sector in the past 12 months.

Net operating income, which includes net interest income and other income, fell 3.3% on year to A$8.237 billion from A$8.514 billion, while operating costs rose 2.4% on year, and its net interest margin rose to 2.26% from the 2.25% it recorded for the six months to Sept. 30, 2009.

Analysts are concerned that while Australia's banks continue to report solid profits, growth drivers for revenue and margin expansion may be harder to come by in future periods.

For his part, Chief Executive Cameron Clyne believes the next phase of growth in the sector will come from a re-emergence of demand from businesses for loans--areas the bank specializes in.

"I think the next wave of credit growth is really going to be around business as businesses become more confident and start to invest, and also around infrastructure as the fairly substantial infrastructure programs get underway," Clyne told reporters.

"I think the question is, when will that occur? Business confidence is strong but it hasn't necessarily translated into demand yet. It'll come but it's a question of whether it will come over the back half of 2010 or early in 2011," he said.

He said the group is well positioned to capitalize on a pickup in demand for business loans, and Chief Financial Officer Mark Joiner said the pipeline of demand for new loans from businesses across most sectors was the strongest the bank has seen in around five years.

Analysts said the group's first half result was in line with expectations.

"We think that this result will demonstrate a bottoming out in many ways, with retail market share lifting, stronger commercial lending pipelines at all banks, the worst of the currency impacts felt and credit costs now clearly on the way down," Citi analysts said.

NAB's charges for impaired loans fell to A$1.23 billion, from A$1.81 billion last year, with the result echoing trends reported by the group's peers Westpac Banking Corp. (WBK) and Australia & New Zealand Banking Group Ltd. (ANZ).

During the half, NAB's wealth management arms--MLC and NAB Wealth--recorded a 31% improvement in underlying cash earnings to A$264 million, boosted by recent acquisitions, while cash earnings at its Business Banking arm improved by 33% to A$1.1 billion, helped by lower bad debts as the Australian economy emerges from the global downturn.

NAB's personal banking arm recorded a 22% drop in first half cash earnings to A$317 million after it cut fees and amid higher funding costs, and its wholesale banking division recorded a A$210 million drop in earnings to A$403 million, reflecting lower global markets and treasury income.

Its U.K. banking arm, which includes the Clydesdale and Yorkshire banks, saw cash earnings rise by 25% to GBP61 million, and Clyne said the group continues to look at its options in the consolidating U.K. banking sector.

"The market opportunities available to NAB in the U.K. range from direct participation via acquisition to entering into joint arrangements with other parties," Clyne said. "But we don't feel pressured to either consolidate or divest," he told reporters. "We feel very pleased with our business there at the moment."

The group is bidding for 318 RBS branches in the U.K., people familiar with the situation have told Dow Jones Newswires.

Clyne also said that NAB continues to pursue its options to obtain approvals for its proposed acquisition of the Australia and New Zealand businesses of AXA Asia Pacific but he wouldn't speculate on which course of action the group was most likely to take.

The competition watchdog last month said it would oppose NAB's planned A$13.29 billion takeover bid for AXA Asia Pacific. Under its planned deal, NAB would have kept AXA Asia Pacific's Australian and New Zealand operations and sold its Asian businesses to AXA SA but the ACCC said the deal would hurt competition.

Among its options, NAB could appeal the ACCC's decision, look to divest some assets to ease the regulator's concerns or push ahead with the deal and wait for the regulator to challenge it.

Clyne wouldn't say whether the bank would be prepared to alter the structure of its offer.

"We're not ruling any options in or out at the moment," Clyne told reporters.

-By Lyndal McFarland, Dow Jones Newswires; 61-3-9292-2093; [e-mail]

(Ross Kelly in Sydney contributed to this article)