Company Overview: National Australia Bank Limited is a business bank engaged in providing personal banking and business banking services. The Company's segments include Business & Private Banking, Corporate & Institutional Banking (CIB), Consumer Banking & Wealth Management, Customer Products & Services and NZ Banking. The Company’s Business & Private Banking focus on medium enterprises (SME) customers, which include NAB business franchise with specialized agriculture, health, Government, education and community services along with private banking and small business segment. CIB includes corporate and institutional banking businesses, fixed Income, currencies and commodities (FICC), capital financing businesses, asset servicing and international branches. Customer Products & Services include banking & wealth products, strategy, digital, NAB labs/ventures, marketing and corporate affairs. Consumer Banking & Wealth Management includes the distribution components of wealth management.


NAB Details

National Australia Bank Ltd (ASX: NAB) has been at its forefront with regards to its accelerated strategy and the group is pleased by its early progress. It is providing a better experience to its customers by simplifying the business and reshaping its workforce. Delivery of new customer experiences with launch of voice-enabled personalised banking through Amazon Alexa and Google Assistant as the group doubled its investments in NAB labs in FY18, has been continuing well. The bank has more of the small business customers with access to faster and simpler unsecured credit facility through QuickBiz Loan while the limit has been increased from $50,000 to $100,000. In 2017, the Group launched 45 initiatives that benefitted about 4 million of customers and 200,000 of businesses. It continues to invest customers’ money through innovative methods like by NAB Labs, NAB Ventures and by developing new partnerships.
 

Vision and Values (Source: Company Reports)
 
First Quarter (2018) Trading Update:  The bank’s first quarter update was decent with cash earnings declining by 1 per cent but otherwise up by 3 per cent as compared to the same period in the prior year. Revenue was up by 1 per cent and reflected good growth in Business and in Private Banking and Corporate and in Institutional Banking. Net interest margin declined but was stable excluding Markets and Treasury impacts while expenses rose by 4 per cent due to higher expenditure on investment and on personnel costs which included an increase in Enterprise Bargaining Agreement. The Group expects that the expenses will grow by 5 to 8 per cent in FY18 and will remain flat by FY19-20. Bad and Doubtful Debt charges fell by 23 per cent and amounted to $160 million and were driven by the non-repeat of collective provision overlay which was raised in 2HFY17. The Asset quality improved with the ratio of 90+ days past due, and gross impaired assets to gross loans and acceptance ratio was down by 3 bps to 0.67 per cent, and this was driven by continued improved conditions of New Zealand dairy customers.
 

Drivers of Financial Performance (Source: Company Reports)
 
Update on APRA’s capital framework: The Banking Group has taken a look at the latest discussion paper released by Australian Prudential Regulatory Authority (APRA) on proposed revisions to set the capital standards such that Australian authorised deposit-taking institutions’ (ADI) capital ratios are unquestionably strong. Consultation on draft prudential standards for credit and operational risk is expected to follow in late 2018 and draft prudential standards which incorporates the remaining Basel III revisions will be released in mid-2019. APRA continued to propose an implementation date of 1 January 2021 and this is subject to further consultation. APRA advised that ADIs that use the Advanced Internal Ratings Based models would require Common Equity Tier 1 (CET1) ratios of at least 10.5 per cent by January 2020 to meet the unquestionably strong benchmark. NAB expects to meet the APRA’s 10.5 per cent target in an ordinary manner by January 2020; and as on 31 December 17, NAB’s CET1 ratio was 10.2 per cent. APRA also proposed a minimum leverage ratio requirement of 4 per cent for Internal Rating Based ADIs; and as on 31 December 17, NAB’s leverage ratio was 5.4 per cent.

Key points from 2017: The Banking Group reported cash earnings of $6.64 billion that were up by 2.5% over the year with revenue and asset quality being key highlights. The group also made $301 million as productivity savings. It had accepted collateral with a fair value as derived from reverse purchasing agreement that included cash and liquid assets and dues from related entities and the bank is permitted to sell and pledge them. The group also expanded its HICAPS health offering to deliver a digital platform, allowing patients to locate a practitioner, get a quote, pay for their consultation and claim their private health insurance benefit in the one mobile app. Partnership with realestate.com.au helped the group combine the aspects of searching for property and getting a home loan in one experience, in order to improve the home buying journey. The group had declared a final dividend of 99 cents per share and this added to the interim dividend of 99 cents per share that led the group return about $5.3 billion in dividends to the shareholders.
 

FY17 Highlights (Source: Company Reports)
 
Corporate Update: Ms Kelly Patterson has been appointed as an Assistant Company Secretary of the Group while Ms Elizabeth Melville-Jones has resigned effectively from 6 April 2018. Ms Penny MacRae will continue to be the Group’s Company Secretary and Ms Victoria Hodges will continue to act as an Assistant Company Secretary of the Company. In terms of shareholdings, the Group ceased to be a substantial holder of Iluka Resources Limited, Link Administration Holdings Limited, Sirtex Medical Limited and Mantra Group, while became a substantial holder of Aurizon Holdings Limited and Costa Group Holdings Limited.

Royal Commission Update: As of now, Royal Commission into the banking sector led to two things that have been highlighted about NAB. Firstly, around 15 per cent of the NAB’s home loans didn’t comply with all of its lending standards which were set out in its lending policy and about 1,360 customers were identified that were potentially affected by the dodgy loans. Secondly, NAB employees have been accused of accepting cash bribes to make loans that were based on documents which they knew were fake and such employees have been reported to be dismissed. While this does lead to a challenging situation for the group, NAB is still in a better position among the major banks in terms of its policy and disciplined structure.
 

2018 Financial Calendar (Source: Company Reports)
 
Stock Performance: NAB has been performing well on margin outcomes as seen in 2H17, while the slow loan growth might impact the margin going forward. Nonetheless, the bank still has the potential to witness some revenue growth with some boost from SME and middle market loans. The group may keep a check on its underlying expense growth given the target to have a flat cost outcome in FY19 and beyond. The Credit Rating of the bank as per Credit Rating Agency, S&P was AA-  which means it has a negative outlook while Moody’s rating was A1 which means it has a stable outlook for the stock. The Group is on track to deliver the targets that were announced when FY17 results were announced. NAB expects to achieve the target of cost savings of more than $1 billion by FY2020. Its financial performance for 1Q18 was sound and its Priority Segment Net Promoter Score further improved in 1QFY18. It achieved a real momentum in executing its strategy with a stable shareholder return as compared to its peers and aspires to achieve the highest return on equity among the other major banks. It has expanded its environmental financing commitment to $55 billion by 2025. The Group will continue to grow and will achieve its vision to be the most respected bank of Australia and New Zealand. Though Royal Commission into the Banking sector has drifted the shares in the recent months, but a history of generous dividend yield and decent performance backed by strong fundamentals, make it a stock worth looking at. We recommend to “Buy” the stock at the current market price of $28.78
 

NAB Daily Chart (Source: Thomson Reuters)

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