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National Australia Bank: Result Coverage

August 23, 2015 | Team Kalkine
National Australia Bank: Result Coverage

National Australia Bank Ltd
  • The bank has released its trading update for the third quarter of FY 2015 which shows good results with progress on strategic priorities.Cash earnings were approximately $ 1.75 billion which is roughly 9% up over the previous year and around 6% more than the quarterly average of the March 2015 results for the half year. On a statutory basis, net profit attributable to the shareholders was around $ 1.85 billion and the difference between the figures is because of the elimination of treasury shares and fair value and hedge ineffectiveness. On the basis of cash earnings, revenues grew by approximately 4%. Excluding a legal settlement gain, gains in the UK Commercial Real Estate portfolio and SGA asset sales, revenue growth was around 2%. There was a decline in the group net interest margin because of weaker income from Treasury and Markets and the competition in business lending. Expenses increased by roughly 4% because of investment in priority customer segments, a small impairment from a legacy equity investment and changes in currency rates. The charges for bad and doubtful debts declined by 15% to $ 193 million mainly because of lower charges in Australian banking. The common equity tier 1 ratio was 9.94% as at 30 June 2015 an increase of 107 basis points over the 31 March figure reflecting the proceeds from the rights issue. Based on current regulatory requirements, the target from 1 January 2016 remains between 8.75% and 9.25%. The quarterly average liquidity ratio was 118%.
      
      NAB Daily Chart (Source - Thomson Reuters)
  • Group CEO Andrew Thorburn said that this was a good result with increased momentum in the Australia and New Zealand business, improvements in asset quality and continuing progress in addressing legacy issues. The bank has maintained a clear focus on the core Australia and New Zealand business and has continued to invest in its priority areas of home lending, SME and Specialised Business segments. Business banking loans growth has accelerated in these priority segments. He was also pleased to see improving results in the wealth business including strong investment fund performance for customers. The bank also continues to progress on addressing legacy issues and assets with low returns. Towards the end of the quarter, the remaining holding in Great Western Bank was divested releasing approximately $ 1.3 billion of capital. In addition, the life reinsurance transaction takes effect from 1 July 2015 and should release a further $ 500 million in capital and reduce exposure to retail life insurance while maintaining the distribution business. Progress has also been made in the demerger and IPO of Clydesdale Bank and further details will be available in the results for the full year. As regards technology, the pilot for the Personal Banking Origination Platform has recently commenced in a live environment and should kick off a major improvement in customer experience. $ 50 million has also been committed over three years to a new initiative NAB Services to accelerate the focus on customer led innovation.
 
  • There was an increase in cash earnings in Australian Banking reflecting the further decline in bad and doubtful debts which is partly due to an overlay in the agriculture and resource sector which is not likely to be repeated. Higher volumes of business lending and housing contributed to higher revenues though partially offset by lower margins and weaker income from markets and Treasury. In New Zealand banking, cash earnings grew because of increased revenues from higher margins and volume growth though partly offset by higher expenses. Cash earnings from the wealth business increased because of favourable investment markets, higher premiums and lower retail claims. In UK banking, local currency cash earnings declined because of the timing of the levy from the Financial Services Compensation Scheme and the Non-Recurrence of a one-time gain in the previous quarter.Metrics regarding asset quality continue to improve and the ratio of past due over 90 days and the gross impaired loans to gross loans and acceptances was 0.78% as on 30 June compared to 0.85% as at 31 March. The ratio of collective provisions to risk-weighted assets was unchanged at 1.01%. The ratio of specific provisions to impaired assets was 35.2% as at 30 June compared to 35.5% as on 31st of March.
 
  • At the time of announcing the half-year results, the bank furnished an update on UK customer conduct matters including the requirement of the UK Prudential Regulation Authority to provide capital support of £ 1.7 billion to Clydesdale Bank in relation to potential future legacy conduct costs to achieve the proposed demerger and IPO relating to that business. That update also discussed the ongoing significant risk and the uncertainty involved in determining the costs of conduct related matters as a contingent liability. Since the release of the half-year results, Clydesdale Bank has continued to operate its remedial program including progress on the business review and the consequent need to undertake further proactive customer contact.On the basis of the work undertaken up to date (which is ongoing and incomplete), the current expectation is that an additional provision regarding payment protection insurance will need to be included in the 2015 full-year accounts and this may be in the range of £ 290 million and £ 420 million mainly because of the increased costs of running the remediation program and the impact of the past business review. Concerning interest rate hedging products the expectation is that an additional provision in the range of £ 60 million and £ 80 million may also be required in the 2015 full-year results.
 
  • We note that despite the current headwinds in the Australian banking sector, the bank was able to grow its profitability despite the poor performance of the international operations with a 9% increase in cash earnings. However, the extra provisions required in its UK operations are substantial and the exact impact will only be available when the results for the full year 2015 become available. However, these provisions will enable the divestments of Clydesdale Bank to go ahead which will be good for the future. All said and done, we believe that this is not the right time to make a decision on buying or selling the stock and we would rate it as a Hold for the time being.
 
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