Stock of the Day - NAB (HOLD)
National Australia Bank Group (NAB), the international financial services organization, caught our attention once again.
On comparing the March 2014 half year results with those of March 2013 half year results, the Bank reported that net profit was $2.86 billion, an increase of $390 million or 15.8%; and Cash earnings were $3.15 billion, an increase of $247 million or 8.5% indicating an improved performance from all banking businesses except for the UK. Revenue increased by 2.6% on a cash earnings basis, but down by 1.2% if foreign exchange movements are excluded.
Group Financial Results (Source – Company Reports)
Further, NAB declared a Group net interest margin (NIM) of 1.94%, down 9 basis points on the March 2013 half year. Lower deposits and funding led to horizontal customer NIM. In view of the foreign exchange rates and UK conduct related charges, expenses at a headline level were found to be up by 11.6%. The increase in the operating expense was 2.9% excluding the above.
The Bank also reported charges of $528 million against the bad and doubtful debts (B&DDs). This was found to be 52% less than previous period, and was primarily due to lower loan losses in Australia and the UK businesses. Approximately $16 billion of term wholesale funding has been raised by the Bank for the financial year to date.
New Zealand Banking local currency cash earnings were up by 3% over the March 2013 half year to NZ$400 million. UK Banking cash earnings improved to £73 million, up 121% on the March 2013 half year. Cash earnings in the NAB UK Commercial Real Estate (CRE) run-off portfolio improved to a loss of £7 million, compared to a £149 million loss in the March 2013 half year and a loss of £90 million in the September 2013 half year. Great Western Bank cash earnings rose by US$8 million or 14% over the March 2013 half year to US$63 million.
Good Result Benefitting from Improved Asset Quality (Source – Company Reports)
As per the Bank, NAB is well in position with respect to the APRA’s recently released framework in relation to Domestic Systemically Important Banks (D-SIBs) and announcement regarding inclusion of intermediate holding companies within the Level 2 Approved Deposit-taking Institution (ADI) group.
Australia and UK Economy and Environment (Source – Company Reports)
The Bank installed Direct Banking Release for origination and servicing of personal banking products. In April, a major upgrade and simplification of on-line business banking portal, nabConnect, was launched.
Improving Risk Profile and Addressing Legacy Issues (Source – Company Reports)
The Bank highlights good growth in earnings in the midst of revenue challenges; improving business confidence; UK economic recovery becoming broad based; and Australia and NZ franchises being on track. High level of customer satisfaction and market share gains were reported over the last five years.
Business Unit Contributions (Source – Company Reports)
The Bank has indicated that it will accelerate run-down of legacy and low returning assets along with managing a control of expenses. Additionally, the Bank would continue to strengthen the balance sheet in terms of capital and asset quality. Further, it aims to abridge the ROE related hurdles while outplaying its peers. The healthy top line growth and investment grade corporate exposures already appear to be positive indicators as opposed to its competitors.
Looking at the past few weeks, we notice the attention turning back to banks in view of ASX listed hybrid market transitioning from over-bought territory to over sold territory, rising US interest rates which have resulted in a decline in the A$, and weak Australian equity market. NAB would thus be interesting to watch over.
In addition to the earlier reported NAB’s announcement on its intend to sell a minority stake in its South Dakota-based subsidiary GWB through an IPO, the Scottish Independence vote may also influence NAB’s performance.
NAB Daily Chart (Source - Thomson Reuters)
With frequent regulatory or economic churning, a lot of speculation/expectation is prevailing, specifically, with respect to certain ‘to be or not to be cooked’ strategic decisions which NAB may take in the near future – For instance, write-off of NAB Wealth goodwill/ or a sale of the business; sale/run-off of UK CRE; successful restructure of the Business Bank; and a sale of NAB UK.
In May 2014, the company completed the acquisition of HedgeMark International, LLC, which deals in hedge fund management and risk analytic services. Then, there is large good will balance from the acquisitions of MLC and Aviva/JB Were. Thus, we do smell that the improved ROE is being stemming from Bank’s organic growth strategy and mix impacts from its businesses.
Balance Sheet continues to Strengthen (Source – Company Reports)
The improving economic environment, strengthening of sectors such as housing in Australia, improved business confidence for NAB, healthier performances in most of the businesses including UK (restructure based changes), speak for something yet to come out of the Pandora’s box. Thus, we put a
HOLD recommendation for the stock at the current price of $32.83.
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