Company Profile - National Australia Bank (NAB) is a financial services organization serving the customers in Australasia. The Company offers banking and financial services ranging from private wealth, investment advisory, to business and institutional banking. The Company’s business segments include Australian Banking; NAB Wealth and NZ Banking. In addition, other segments include UK Banking; NAB UK Commercial Real Estate (NAB UK CRE), and Corporate Functions and Other. Australian Banking offers a range of banking products and services to retail and business customers. NAB Wealth provides superannuation, investments and insurance solutions. NZ Banking comprises the Retail, Business, Agribusiness, Corporate and Insurance franchises in New Zealand. UK Banking operates under the Clydesdale and Yorkshire Bank brands offers banking services for both personal and business customers. NAB UK CRE’s portfolio business comprises approximately £5.6 billion of commercial real estate loan assets.

Partnering with Nippon Life Insurance; Joined ASX mFund settlement service: National Australia Bank Ltd. (ASX: NAB) is seeking a long term relationship with Nippon Life Insurance, to create life-insurance products as a part of the bank’s initiative to enhance its wealth division that has insurance business, and recently entered into a nonbinding memorandum of understanding. Based on the speculations and news reports, Nippon Life Insurance might offer a deal in the range of 200 billion and 300 billion yen or US$2.5 billion, to buy National Australia Bank’s insurance operation. Management intends to focus on its core Australia and New Zealand businesses and has offloaded its non-performing assets. Any possible deal with Nippon Life Insurance would further boost its capital position, helping the bank to meet the regulatory requirements. On the other hand, NAB Asset Management, nabtrade, and NAB Asset Servicing have joined the ASX mFund Settlement Service, which is an electronic processing service that enables investors to use the ASX broker to apply and redeem units in unlisted managed funds. The bank is the forefront player to join the mFund service in ASX and accordingly would provide specialist investment solutions and registry services. Meanwhile, nabtrade would also be able to leverage the growing demand from the self-directed investors who are seeking ways to diversify their portfolio. Nabtrade’s smarter digital investing capability would generate an enhanced value as well as solid access to insights, and a range of investment solutions.
 
 
 
   National Australia Bank’s credit risk exposure (Source: company reports)
 
Efforts to enhance customer relationships to offset regulatory pressure: NAB Wealth division is contacting its customers as a part of its customer response initiative program to enhance its customer’s experience with NAB Wealth as well as rectify any problems in the divisions. The bank’s wealth division has reported that they finished over $1.7 million in payments to 87 customers since February after resolving their claims for compensation. The bank reported that half of the clients who got compensation for their claims received $5000 or less. The bank would continue to respond to its new complaints within 45 days as committed. On the other hand, Australian Securities and Investments Commission said that National Australia Bank needs to compensate clients who might have become victims of the bank’s poor advice since 2009. Rumors have been swirling around that National Australia Bank’s advice had led to a severe financial impact on many customers while the bank’s advisers were also suspected with involving in misconduct, forgery and fraud related to consumer loans made by the bank. Reports also came around the bank’s possible dismal of 37 planners for  conducting misconduct and consequently leading to ASIC's review on National Australia Bank’s management on its financial planning division. Meanwhile, ASIC ensured that the CRI offered a fair and active mechanism to justify the customers who need to be effectively compensated from National Australia Bank. The Bank also welcomed the regulatory requirements and is accordingly working towards enhancing its client’s relationships by enhancing its capabilities. 



NAB Daily Chart (Source - Thomson Reuters)

 
Hiked Interest rates in Home loans to boost capital positions: The bank recently hiked the interest rate on all of its new as well as current variable rate home loans by 0.17% per annum to 5.60% per annum which would be effective from November 12, 2015, to boost its capital position related to residential mortgages in order to comply with the regulatory changes. National Australia Bank had boosted its capital position in the month of May during this year by raising $5.5 billion to comply with the capital requirements. Management reported that they are on track to meet the APRA’s requirement of an increase in mortgage risk weights effective from July of the next year. From an overall perspective, National Australia Bank’s Common Equity Tier 1 (CET1) ratio improved by 107 basis points to 9.94% as at June 2015, against March 2015 driven by the rights issue proceeds. NAB is on track to achieve its CET1 target ratio in the range of 8.75% to 9.25% as per the current regulatory requirements. The bank’s cash earnings improved around 9% on a year over year basis to $1.75 billion during the June quarter, and rose by 6% as compared to the quarterly average of the March 2015 Half Year performance. Meanwhile, National Australia Bank maintained its fixed rates and cut its, three and four-year fixed home loan rates during the starting of the year. National Australia Bank had earlier reclassified some house hold data to comply with the regulatory reporting obligations, while the reclassification has no impact on the clients nor would change the bank’s risk weighed assets, regulatory capital, cash earnings and balance sheet.
 
 
 
        
 
       Growing market share and enhancing mortgage net promoter score (Source: Company Reports)


Divesting non-core business to enhance focus on core divisions: National Australia Bank is divesting its non-core business to increase its focus on its profit generating core Australia and New Zealand Business. Accordingly, the bank divested its entire Great Western Bank share and sold its final share of 28.5% of Great Western Bank’s common stock in July 2015. This divestment enabled the bank to improve its overall CET1 ratio by over 34 basis points. However, the bank made a loss of $396 million related to the GWB book value while the final offering is forecasted to result in a loss of $67 million, which would be reflected during the 2015 September results. National Australia Bank is also offloading its struggling UK Clydesdale Bank, and demerging over 70% to 80% of its stake to NAB’s shareholders while the rest of the share would be sold via an IPO to institutional investors. National Australia Bank would be giving more clarity on its demerger and IPO of Clydesdale Bank during the 2015 fiscal results. On the other hand, UK Prudential Regulation Authority (PRA) reported that the bank needs to offer £1.7 billion capital support to Clydesdale Bank related to the possible future legacy conduct costs to realize the proposed demerger and IPO of that business. Accordingly, the group forecasts an additional provision with regards to the payment protection insurance which might be recognized during the finalization of the bank’s accounts during the full year 2015 results. The provision is estimated to be in the range of £290 million to £420 million, impacted by the rising costs to run the remediation program as well the past business review. The bank might also incur an extra provision in the range of £60 million to £80 million related to the interest rate hedging products as per the current compensation calculations for completed reviews (and assuming these would be stable) during the full year 2015 results.
 
 
 
 

 
Proposed transaction structure (Source: Company Reports)

 
Stock Performance: The shares of National Australia Bank declined over 13% (as of Oct 26, 2015) in the last six months partly impacted by the UK operations divestments. However, the bank has already diverted over £1.7 billion funds under its conduct mitigation package. The bank also delivered a pleasing performance in the third quarter despite the tough market conditions, with revenues rising over 4% on a year over year basis during the third quarter of 2015. The bank is also improving asset quality of its core Australian and New Zealand business and invested on its home lending, SME and Specialized Business, to enhance its customer experience as well as improved its business banking loan portfolio and wealth business. Meanwhile, the stock recovered over 8.86% in the last four weeks partly boosted by a possible partnership with Nippon Life Insurance and ASX mFund Settlement Service. Moreover, National Australia bank is trading at an attractive valuation with a relatively cheaper P/E of 13.3x. The bank also has a solid dividend yield of 6.1%. We maintain our positive stance on the stock ahead of its full year results and based on the foregoing, we reiterate our BUY” recommendation on the stock at the current stock price of  $32.42.

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