Company Overview – The Melbourne based major Australian bank is a diversified financial services group, traditionally focused on business banking with a strong presence in wealth. Off shore operations in New Zealand, the UK and U.S round out the group. The Australian and New Zealand banking franchise covers the consumer, small business, corporate and institutional sectors. National Australia bank is currently the fourth largest by market capitalisation and benefits from a large national branch network and improving market share in home loans and retail deposits. In Australia it operates through NAB, MLC and U Bank. In the United Kingdom it operates through Clydesdale Bank and Yorkshire Bank. In New Zealand it operates through Bank of New Zealand. In the United States it operates through Great Western Bank.

Analysis – NAB classifies its business operations in nine reportable divisions: Business Banking, Personal Banking, Wholesale Banking, The UK Banking, NZ Banking, NAB Wealth, Great Western Bank, Specialized Group Assets and Corporate Functions.
Business banking division of the bank provides commercial banking services to business customers. The division’s key offerings include business accounts, foreign currency accounts, savings accounts, international and domestic trade finance, agribusiness loans, vehicle and equipment loans, business loans, business cards, credit cards, payment cards and charge cards. The company’s personal banking division provides banking services to retail customers and small businesses. Wholesale banking division is focussed on various business including global markets and treasury. The Geographic classification of the business is as follows:-

Country	% Income Accounted For
Australia	78.18%
Europe	11.35%
NZ	7.06%
US	2.35%
Asia	1.06%

Australia’s banking regulator, the Australian Prudential Regulation Authority has increased the capital conservation buffer that applies to the four major Australian banks by 100 basis points (1.0%) effective 1^st January 2016. The APRA framework released on 23December 2013 classifies Australia’s four major banks as domestically systemically important banks under the tough Basel 3 capital rules. Macquarie Bank Limited along with the regional banks like Bendigo & Adelaide Bank, Bank of Queensland and Suncorp were excluded.

The 1 % surcharge to the current 2.5% capital conservation buffer for the big four banks takes the buffer to 3.5% in addition the minimum capital requirement for the common equity tier 1 ratio of 4.5%. Therefor by 1^st January 2016 the big 4 banks are going to hold 8% CET 1 capital. NAB with a CET 1 ratio of 8.4% is well above.

UK part of the business Clydesdale Bank have published their lending data by post code and region. The £16 billion core UK mortgages portfolio confirmed that the UK mortgages balances are more geared towards the underperforming UK North region with 50% of exposure directed to this area. As such opportunities for cost out via branch consolidation in the event of a acquisition of Clydesdale bank by any lender remains limited. We believe that the path towards the UK exits remains some way off.

In saying that the UK commercial real estate market continues to improve with recent sales showing some improvement in valuations. Given NAB’s conservative provisioning in the space and some signs of life outside of London, this is supportive of our view that NAB’s impairment charge will continue to moderate this year.



The UK commercial real estate market continues to go from strength to strength. Sales in to the tail end of last year showed some reasonable improvement in discounts to face value, selling for 38% to low single digit discounts respectively. A year ago impaired portfolio discounts were50%+.
The Bank of England is forecasting GDP growth of 2-3% in 2014, up from 2% in 2013. Credit growth has picked up due to the monetary policy. NAB UK revenue should benefit as credit growth picks up. NAB remains committed to its plan to sell the UK franchise but not at any price. Given an improving UK macro, it may well be that it can get a better price this year.

Recently Fitch Ratings affirmed the “A” rating of NAB’s Clydesdale Bank in the United Kingdom because of the backing provided by its Australian parent. Clydesdale Bank's ratings was cut by international ratings agencies in the aftermath of the financial crisis as the British economy slumped into a recession, putting pressure on the business and sparking calls in Australia for NAB to offload the group.
 
 
Fitch said Clydesdale was of "low strategic importance" to NAB, "given its fairly small size in relation to the group and own branding in a noncore geography. “NAB has stated that it is likely to sell Clydesdale Bank in the medium term," Fitch said.

NAB	Industry Median	2013	2012	2011	2010	2009
Profitability
Net Interest Margin	2.14%	2.02%	2.11%	2.25%	2.25%	2.16%
Efficiency Ratio	48.4%	45.2%	49.8%	49.7%	50.2%	47.6%
Operating Leverage	3.4%	9.4%	(0.3%)	1.1%	(5.7%)	5.6%
Risk
Loan Loss Provision (% of Avg. Loans)	0.27%	0.45%	0.70%	0.47%	0.80%	1.09%
Nonperforming Loans (% of Total Loans)	0.78%	0.59%	0.59%	0.55%	0.65%	0.61%
DuPont/Earning Power
Pretax ROA	1.4%	1.0%	0.8%	0.9%	0.8%	0.8%
Pretax ROE	19.8%	18.2%	14.3%	16.6%	14.8%	14.1%

 
NAB remains committed to its plan to sell the UK franchise, providing they can achieve a price they are happy with. IF NAB is unable to find a suitable buyer in the near term we expect the group to look to continue to strengthen the UK business and prime it for sale through organic growth.

NAB	2013	2012	2011	2010	2009
Interest Income, Bank	31,311	34,542	34,270	29,824	31,102
Total Interest Expense	17,960	21,300	21,236	17,568	19,034
Net Interest Income	13,351	13,242	13,034	12,256	12,068
Net Income After Taxes	5,460	4,083	5,220	4,225	2,589

 
As a result of the interest rate cut to a record low 2.5% by the Reserve Bank of Australia, total lending  finance which includes personal loans, home mortgages, business lending and lease financing has grown by 23% towards the end of 2013, marking the fastest annual pace since January 2008. Due to a strong rebound in business loan growth (SME franchise provides leverage to a rebound in business loan growth), better than expected business bank and UK loan losses, additional cost cutting, a good UK exit strategy, improved wealth performance. We will be putting a BUY on NAB at the closing price of $33.82.
 

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