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.



NAB Details

Efficient Capital Position: To maintain an efficient capital position, National Australia Bank Ltd (ASX: NAB) is considering issuance of a new ASX listed Additional Tier 1 capital security which will be subject to market conditions and including any competing supply. Meanwhile, the Group’s Common Equity Tier 1 (CET1) ratio was 9.7% as at 31^st March 2016 which is a decrease of 55 basis points from September 2015 due to the impact of the CYBG demerger and IPO while including the conduct indemnity. Despite this, the Group’s CET1 target ratio remains between 8.75% – 9.25%. The group recently redeemed its US$600 million Perpetual Capital Notes (Capital Notes) that was issued in 2009. Each Capital Note would be redeemed for cash at its Cash Redemption Price. NAB has a strong asset quality with 90+ days past due and gross impaired asset ratio of 0.78%. S&P Global Ratings also gave an ‘AA-’ long term rating for the group. On the other side, the bank is issuing NAB Capital Notes 2 to raise $1.35 billion. The bank intends to use the net proceeds of the Offer for general corporate purposes while APRA confirmed that this NAB Capital Notes 2, could qualify as Additional Tier 1 Capital for the purposes of NAB’s regulatory capital requirements.
 


Capital Position (Source: Company Reports)
 
Divesting non-core business to enhance efficiency as well as to focus on core markets: NAB is planning to set up a life insurance business separately from NAB's superannuation and investments business. For this, NAB has made an agreement with Japan's Nippon Life by selling 80% of its life insurance business which would be completed by second half of 2016. On the other side, NAB has exited its investment in CYBG Group, a UK based banking group, by demerging 75% of the CYBG Shares to NAB Shareholders. The remaining of the CYBG Shares were divested by NAB under an institutional offer. Accordingly, NAB Wealth cash earnings has increased 12% to $249 million in 1H 2016 driven by stronger Insurance results. Moreover, the net income rose 4% reflecting insurance premium growth and pricing increases combined with improved claims expense and stable lapse performance.
 
Creating Largest Pension Fund: The bank recently announced for merging of five of its pension funds into one, to create Australia's largest retail superannuation fund that has about A$70 billion ($53 billion) under management. The Fund would be called the MLC Super Fund. In addition, the merger of fund would lead to cost savings through lower fees and would 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 would 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.
 
Transformational Investment Program: NAB is investing at least $300m pretax over four years in Superannuation and Investments business and targeting the peak annualized benefits of approximately $160m pretax across both Bank and Wealth. Meanwhile, National Australia Bank has become among the big four banks to ban lending to foreign buyers without domestic income. The other three banks are Australia and New Zealand Banking Group, Commonwealth Bank of Australia and Westpac Banking Corp, which had introduced the rules to restrict lending to foreign buyers over the past few months. The bank also lowered its loan-to-valuation ratio (LVR) to 70% from the more usual 80% and would evaluate the lending to foreign buyers on a case-by-case basis. Accordingly, NAB would now only consider the foreign home loan applications for buyers with Australian income.
 
Diversified Profile: NAB has deep industry specialization in Agribusiness, Health, and Government & Education and holds strong position in high returning sectors as it has number one market share in Micro, SME & Agribusiness. NAB’s mortgage sales is growing at 40% CAGR through aligned and independent advisor from FY 13. On the other side, NAB has a diversified funding profile and has accordingly raised $17.7 billion of term wholesale funding in the March 2016 half year across a range of markets. The weighted average term to maturity of the funds raised by the bank over the first half of March 2016 was 4.7 years. Meanwhile, the stable funding index was 89% at 31^st March 2016.
 


Mortgage Sales First Half of 2016 (Source: Company Reports)
 
Decent first half of 2016 Financial Performance: National Australia Bank was able to deliver a decent first half of 2016 performance despite challenging conditions in the market wherein the NZ Banking business is facing challenges from dairy industry. On the other hand, the investment in Auckland delivered strong volume growth. Number of mortgage brokers in Auckland rose from 100 in Jun 15 to about 230 in March 2016. Meanwhile, NAB witnessed 3.3% growth in net operating income in the first half of 2016 compared to the corresponding period 2015. Accordingly, overall the cash earnings grew 6.5% in first half of 2016 as compared to first half of 2015. Australian Banking cash earnings up 5% and revenue up 4% during the period as compared to March 2015 half year. Moreover, excluding the foreign exchange rate movements, the net interest income has increased by $383 million or 6.2% in the first half 2016 as compared to the first half of 2015, including the gain of $47 million which is partially offset by movements in economic hedges in other operating income. Additionally, the remaining increase was driven by the higher volumes in the housing and business lending and deposits, combined with improved housing lending and deposit margins due to the repricing. However, these were partially offset by increased funding costs and competitive pressures on business lending margins.
 


NAB’s Australian & New Zealand Performance (Source: Company Reports)
 
Stock Performance: The shares of National Australia Bank have been under pressure and fell over 20.5% (as of July 15, 2016) in the last one year. The stock has continued the weak momentum even this year and delivered a negative year to date returns of over 10% (as of July 15, 2016). This decline in the stock was mainly due to the challenging conditions in the market due to Brexit coupled with declining performance in the housing market. On the other hand, the bank has de-risked its exposure to the UK markets by demerging CYBG from its portfolio. With positives including the aforementioned, NAB stock thus recovered over 3.72% in the last four weeks with 3.68% rise in last five days alone, and we expect to see potential in long term although short-term market headwinds may prevail. Moreover, NAB has declared an interim dividend of 99 cents per ordinary share and has an outstanding dividend yield. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of  $25.94
 

NAB Daily Chart (Source: Thomson Reuters)

---

Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.