Company Overview - National Australia Bank Limited is a business bank. The Company provides personal banking and business banking services. The Company's segments include Australian Banking, NZ Banking, NAB Wealth, and Corporate Functions and Others. The Company's Australian Banking includes personal banking and business banking offering a range of banking products and services to retail and business customers, ranging from small and medium enterprises to large institutions. The Company's NZ Banking comprises the retail, business, corporate and insurance franchises in New Zealand. These franchises operate under the Bank of New Zealand (BNZ) brand. The Company's NAB Wealth provides superannuation, investment and insurance solutions to retail, corporate and institutional clients. It operates a network of financial advisors in Australia under brands, which include MLC, JBWere, JANA and Plum.

NAB Details
Financial Performance for FY 16 highlights: National Australia Bank Ltd (ASX: NAB) in FY 16 reported 4.2% growth in the cash earnings of $6,483 million. Moreover, on a cash earnings basis, the revenue grew 2.5%. Excluding gains in the March 2015 half year from a legal settlement and the UK Commercial Real Estate loan portfolio sale and SGA asset sales, the revenue grew approximately 3.7%, due to the higher lending balances and stronger Markets and Treasury income. On the other hand, the statutory net profit of $352 million indicated a fall of 94.4% due to the loss on sale for both CYBG PLC (CYBG) and 80% of NAB Wealth’s life insurance business. Excluding the discontinued operations, the statutory net profit has decreased 5.6% to $6.42 billion.
 

Cash Earnings (Source: Company Reports)
 
The group net interest margin (NIM) has declined 2 basis points mainly due to higher funding costs. In addition, the charge for bad and doubtful debts grew 7.0% to $800 million, primarily due to the higher specific charges relating to the impairment of a small number of large single name exposures in Australian Banking. On the other hand, NAB’s 20% interest in MLC Life insurance business is included in continuing operations cash earnings and reported as a share of associate profit in NAB Wealth earnings. In addition, NAB has retained MLC brand, but licensed for use by the MLC Life insurance business for 10 years. MLC brand would continue to be applied to NAB’s superannuation, investments and advice business.
 

Fiscal year of 2016 Performance (Source: Company Reports)
 
Completed the major divestments to manage expenses: In FY 16, NAB has completed the major divestments including the exit from CYBG and the sale of 80% of the life insurance business to Nippon Life. Therefore, NAB has organized the portfolio towards business lines with higher returns and capability in the competitive environment. On the other side, NAB has managed the group’s operating expenses in fiscal year of 2016 with productivity savings reported of $187m (2H16 increase $98m). NAB is targeting ongoing annual productivity savings of greater than $200m pa.
 

Well managed Operating Expenses (Source: Company Reports)
 
Increasing focus on customer experience: NAB has done organizational restructuring to focus mainly on their Australian and New Zealand businesses. NAB’s investment spend is more focused on customer and productivity initiatives and productivity savings via third party expenses, process automation, customer journeys, Personal Banking Origination Platform (PBOP).  Meanwhile, the bank’s customer efforts are evident from the fact that their NPS has moved up in the priority segments. NAB has deepened the relationships in the priority segments, by moving from third to first amongst major peers on priority segment Net Promoter Score (NPS). On the other side, NAB is piloting use of process automation technology and seven processes have already been automated in 2H16 while there is a pipeline of more than 30 to be delivered in FY17. Additionally, NAB is redesigning customer journeys end-to-end to improve experience and efficiency. Recently, NAB launched mobile banking app and innovative small business solutions like the NAB QuickBiz Loan, which was developed in NAB Labs. The group finished their roll out of Personal Banking Origination Platform (PBOP) across their retail network to enable the personal products experience for customers. The group is also making efforts to identify customers’ “pain points”, via customer and bankers’ feedback. Accordingly, NAB Assist currently has lowest proportion of Financial Ombudsman Service complaints in the industry.
 
Well diversified funding profile:NAB has a well-diversified funding profile and has raised $36.4 billion of term wholesale funding in FY 16. The weighted average term to maturity of the funds raised by NAB over FY 16 is 5.4 years. The stable funding index was 91% at September 30, 2016, which is 2% points higher than at March 31, 2016. On the other side, National Australia Bank has streamlined the superannuation business by merging five of the super funds into one to create Australia’s largest retail super fund. The Fund is called the MLC Super Fund. In addition, the merger of fund has led to cost savings through lower fees and offer more investment options to the investors for managing their retirement savings. Meanwhile, the high cost of superannuation was highlighted by financial system inquiry in 2014 as a key weakness in the system, and regulators have been keen to encourage more fund mergers. Therefore, the merger of funds will strengthen NAB’s position. Moreover, Australia’s government is looking to boost the competition among funds in the world's fifth largest pension market which is currently valued at $1.5 trillion.
 
Boosting capitalposition: NAB has maintained a strong capital, liquidity and funding position to continue to lend to their customers. NAB has posted a sound asset quality of $100m top up to collective provision overlay for fiscal year of 2016. NAB also has a strong capital position at 9.77% CET1 that is above the target range of 8.75% – 9.25% and the bank has surplus franking credits. The Leverage ratio is 5.7% on an APRA basis and 6.2% on an Internationally Comparable basis. In addition, Internationally Comparable CET1 ratio grew 98bps in the second half of FY16 to 14%, reflecting mainly mortgage risk weight change and ratio comfortably is within top quartile of global peers based on recent studies. Moreover, NAB Group NSFR (net stable funding ratio) is more than 100% as at September 30, 2016, based on draft APRA rules and minimum 100% compliance is required by January 01, 2018. National Australia bank now has long-term debt ratings of AA-/Aa2/AA- from S&P Global Ratings (S&P)/Moody's Investors Service (Moody’s)/Fitch Ratings (Fitch)). The group’s credit quality is also on track while the B&DDs are stable and below the long-term average. NAB has a decent specific provision coverage at 38.3% of gross impaired assets.
 

Common Equity Tier 1 Capital Ratios (Source: Company Reports)
 
NAB’s efforts to position for future growth: The bank’s majority of the revenue is dependent on their net interest margin which has been falling since few years. This trend has been impacting the bank’s performance. Therefore, the group is focusing on priority segments across the Australian Banking businesses like agribusiness and health to maintain their competitive edge. Moreover, with Australia’s economy now shifting from mining-led to services driven, the bank is strengthening asset quality and capital position to withstand even in volatile environment. NAB believes that their lending policies would protect customers from taking risks.
 
Stock Performance: National Australia bank stock rose over 4.4% in the last three months (as of November 18, 2016). NAB has invested in technology and has rolled-out the Personal Banking Origination Platform (PBOP) across the retail network in FY 16 to make it simpler to apply, and faster to approve the personal products for customers. Moreover, NAB has launched the new mobile banking platform and introduced the NAB QuickBiz Loan. The bank has appointed Anne Loveridge, Doug McKay and Philip Chronican to the Board. NAB in FY 17 has reshaped business, and is now well-placed to meet the upcoming regulatory change and is responding to the changes resulting from the Government’s Financial System Inquiry and Basel III. The bank is also seen as the most leveraged major to the SME business segment and there are some signs of recovery in credit growth as well. The stock is also trading at a very good dividend yield. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of – $ 28.45

 
NAB Daily Chart (Source: Thomson Reuters)

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