UPDATE 2-Australia's NAB points to improving economy, cuts impairment charges

(Adds CEO quote, analyst comment, background)

SYDNEY, Feb 16 (Reuters) - National Australia Bank Ltd posted a pickup in quarterly profit from the previous two quarters on Tuesday as it wound back pandemic-driven bad loan provision charges, and pointed to encouraging signs on the economy.

The country’s No.2 lender by market value reported cash earnings of A$1.65 billion ($1.28 billion) for the three months ended Dec. 31. The result was flat on a year ago but a 47% improvement to the average quarterly result in the previous half, the bank said in a limited quarterly earnings update.

“Improving economic and health outcomes in Australia and New Zealand are encouraging,” Chief Executive Ross McEwan said in a statement.

“However, there are still a number of uncertainties ... (including) the impact on customers of ongoing health alerts and measures put in place to contain the spread of COVID-19.”

As Australia emerges from the coronavirus crisis in better shape than expected after controlling local outbreaks, banks are starting to lower charges to bad loan provisions, which had grown to over A$23 billion in 2020, while record-low interest rates and weak lending volumes during the pandemic also hit earnings.

Commonwealth Bank, NAB’s largest competitor last week posted better than expected earnings for the first half of its fiscal year due to lower provision charges and flagged it would challenge NAB’s as the country’s leading business bank.

NAB, which controls about one fifth of the business banking market, said on Tuesday it had added about 440 new roles in its business and private banking division and would target another 110 this year.

Credit impairment charges for the quarter slumped 98% compared with the second half of 2020, NAB said, as more borrowers began repaying deferred loans.

NAB shares rose 2.2% in early trading, while the broader market was up 0.6%.

“This bodes well for the Dec-20 quarter trading updates from Westpac tomorrow and ANZ on Thursday,” said Azib Khan, a banking analyst at Morgans Financial.

NAB noted that after remaining stable last year, impaired loans had increased 17 basis points to a still “better than expected” 1.18% of gross assets as a pandemic loan holiday expired in October. ($1 = 1.2853 Australian dollars) (Reporting by Paulina Duran in Sydney and Nikhil Subba in Bengaluru; Editing by Grant McCool and Richard Pullin)