In today’s daily we have covered stock research on NAB (HOLD).









 
The S&P 500 was down by 12.06points or 0.60%on Thursday to 1999.21 points. U.S. stocks fell in afternoon trading Thursday, putting them on track for a fifth day of losses, as bank results disappointed and investors fretted over the potential impact of global economic weakness on U.S. earnings. Oil prices settled down more than 4 percent after weak U.S. economic data spurred worries over oil demand.

The S&P financial sector   led the day's decline with a drop of 1.1 percent. Bank of America lost 4.8 percent and was among the S&P 500's biggest drags after the second-largest U.S. bank by assets reported a 14 percent slump in quarterly profit. Citigroup   shares fell 3.4 percent after its quarterly results. Trading will likely remain volatile after the Swiss National Bank scrapped its cap on the franc. Swiss stocks traded in the United States climbed. 



Bank Of America Daily Chart (Source – Thomson Reuters)
S&P ASX 200was down by 22.23points or 0.42%on Thursday  and closed at 5331.37 points. Santos rose 1.77 per cent to $7.49, Oil Search lost 0.14 per cent to $7.19 and Drillsearch gained 4.20 per cent to 74.50 cents. Oroton plummeted 24 per cent to $2.95 – the lowest since mid-2009. Japanese human resources giant Recruit Holdings announced it would buy local listed rival Chandler Macleod in a deal worth $382 million.
BHPtumbled 1.03 per cent to $26.92 and Rio Tinto dived 2.38 per cent to $54.22. Among the banks, ANZ lost 0.73 per cent to $31.44, Commonwealth Bank shaved off 0.07 per cent to $83.62, and Westpac dropped 1.21 per cent to $32.72. SPI futures are down 10 points to 5270 at 6.19am AEDT. The Australian dollar opened for local trading at US82.16¢, little changed from Thursday’s local close of US82.12¢.

Oroton Daily Chart  (Source – Thomson Reuters)
 
Top Performers on the ASX 200 were :-


 
 
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Stock of the Day - NAB (HOLD)

NAB sold £1.2bn parcel of higher risk UK Commercial Real Estate (CRE) portfolio sometime back. The sale reduced the higher risk loans in the portfolio by 93%. Such loans are mainly defaulted, watch, and high LVR loans. The remaining UK CRE loans totaled £836m and have been reported to be largely performing. NAB plans to explore options to manage the remaining portfolio. The Bank directed a small gain on sale and £127m ($240m) of capital to be released based on settlement of the transaction. NAB intends to review collective overlay held against the UK CRE book at 1H15. Owing to the adoption of AASB 9 which would increase provision levels, the overlay release may be limited despite the reduction in the UK CRE book. Issues still at hand and needing resolution include exiting the UK business, bettering ROE in the wealth business, and bringing momentum in the core Australian and NZ businesses.


NAB UK CRE Run-off (Source – Company Reports)

We also note that DBRS recently confirmed NAB’s rating at AA with a stable trend. The ratings indicate an intrinsic assessment (IA) of AA (low), combined with a support assessment of SA-2. The SA-2 reveals NAB’s significance for the financial system in Australia, and the generally supportive regulatory framework. The Bank’s AA subordinated debt ratings have been placed under review with negative implications. The overall rating indicates strong Australian and NZ franchises, and generation of predictable earnings therefrom along with relatively low risk profile. DBRS opines positively on the potential exit from the USA and UK given its view that these operations are sub-scale within those markets. Despite the pressure owing to UK-related ‘conduct costs’, NAB reported income before provisions and taxes (IBPT) of AUD 8.8 billion, down 12% YoY and net profit of AUD 5.3 billion.


Net Operating Income (Source – Company Reports)

The Bank reported sales of A$44.13 billion for FY14 ending September, reflecting 8.1% decrease versus 2013 owing to 21.3% decline in NAB Wealth (though partially offset by increase in sales of NZ Banking and UK Banking and NAB UK CRE). As of September 2014, the long term debt was A$107.23 billion and total liabilities were A$838.11 billion. There was a dip in impairment charges indicating lower charges in Australian Banking and NAB UK CRE in 2014. The total charge for bad and doubtful debts reduced to only 0.17% of gross loans and acceptances. The total gross impaired loan ratio improved to 0.76% at end of September 2014 with a coverage ratio of 99% due to lower levels of new impaired assets across Australian Banking, UK Banking and NAB UK CRE, and the run-off and repayments within NAB UK CRE portfolio, including the sale in July 2014 of GBP 625 million of impaired loans. The Bank reported an APRA Basel III Common Equity Tier 1 ratio of 8.6% (up by 20 bps YoY) as at end of September 2014. This is in excess of APRA’s 8% minimum requirement by 1 January 2016.


Customer Base (Source – Company Reports)

For NAB, there may be an issue with regards to the David Murray led Financial System Inquiry and particularly the “Top Quartile” target which accounts for >50% of the $6.9b capital required. The Bank has a strong growth (11%) but its interest only lending is low at 31% of the total book. The domestic business needs investment with a further rebasing of earnings. Capital release from divestment may look captivating in such circumstance.


Business Banking Customer Revenue (Source – Company Reports)

Recently, the Bank and the Export-Import Bank of China have signed a MoU to support the collaboration between the two parties to augment coordination in areas, including syndication, project finance, daily FX trading, etc. NAB has also deployed a new NAB View tool at its 4500 business bankers for providing improved advice to customers.


Headline Results (Source – Company Reports)

The launch of a new credit card offering zero percent interest for 15 months on purchases on its low rate card is another recent update. The opening of a new representative office in Vietnam as part of ITS ongoing investment in capabilities throughout Asia, has also been announced late 2014.


Regulatory Changes and Updates (Source – Company Reports)

Extensive exposure to the business sector would help fetch benefits owing to demand for business credit. Further, aggressive retail banking marketing and pricing strategy is expected to lead to a robust raise in new customers, loan growth and customer deposits. The competition is high though the net interest margins in Australia and NZ are stable. Thus, the new management at the Bank would require to re-establish the market-leading business banking platform through business and earnings momentum.


NAB’s Operational Focus in Asia (Source – Company Reports)

Given the above, a potential growth in operating income in FY15 and FY16 is expected. The Bank has balance sheet leverage (ratio of assets/equity) at 17 to 18 times. However, considering the efforts required for bettering credit, operational costs and funding costs, NAB should reduce leverage closer to 17 times leverage as NAB’s higher-risk business and consumer loans signify ~50% of its total assets. From market standpoint, 2015 is expected to have a moderate economic activity in Australia with reasonable growth expected in the UK and the US. The outlook may however be poor in Europe and Japan. China’s economy, though slowing down a little, may lay down some opportunities.


NAB Daily Chart (Source - Thomson Reuters)

Accordingly, we put a HOLD recommendation for this stock at the current price of $33.52.

 
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