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

Positive movement on Wall Street during the end of last week led Australia’s big four banks move up on ASX with the opening of trade on September 18, 2017. Further, interest-only home loans have been getting the banks back into action (with fixed interest rate cuts) while a regulatory cap on higher-risk lending has been levied by federal government. This along with National Australia Bank Ltd.’s (ASX: NAB) healthy third quarter earnings result with improved revenue quality, sets a positive view on the bank’s prospects going forward.

Improving asset quality while capital and funding positions remain solid: For Q3FY17, National Australia Bank reported a 2% QoQ (Quarter on Quarter) revenue growth led by growth in lending and improved Group net interest margin (NIM) partly offset by lower Markets and Treasury income. The bank had reported its unaudited statutory net profit at $1.6 billion while posting unaudited cash earnings of $1.7 billion that have been up 2% compared to March 2017 Half Year quarterly average and 5% over prior corresponding period (pcp). On the other hand, Bad and doubtful debt charges (B&DDs) fell 12% to $173 million due to improved asset quality trends and non-repeat of the collective provision overlay for commercial real estate raised in the March 2017 Half Year. Further, ratio of 90+ days past due (DPD) and gross impaired assets (GIAs) to gross loans and advances (GLAs) at 0.80% declined 5 basis points (bps) from March 2017, driven by improved conditions for New Zealand dairy customers.


Asset quality; (Source: Company reports)
 
Well positioned to meet the new regulatory capital ratios: For Q3FY17, Group Common Equity Tier 1 (CET1) ratio declined by 40 basis points to 9.7% compared to 10.1% at March 2017, largely due to the impact of the interim 2017 dividend declaration and 17 bps for higher risk weights due to previously advised mortgage model changes. Leverage ratio (APRA basis) and Liquidity coverage ratio (LCR) stood at 5.3% and 127%, respectively, while Net Stable Funding Ratio (NSFR) stood at 108%. The major bank levy became effective from 1 July 2017 and is estimated to cost NAB approximately $375 million annually, or $265 million post tax, based on 30 June 2017 liabilities. On the other hand, in July, the Australian Prudential Regulation Authority (APRA) announced a CET1 ratio target of at least 10.5% by January 2020 for major banks to be viewed as ‘unquestionably strong’, with finalisation of international capital reforms not expected to require any further increases to Australian requirements. NAB expects to meet APRA’s new capital requirements in an orderly fashion as it has built a capital buffer above its CET1 target range in anticipation of such changes. For this full year, bank has remained confident of achieving more than $200 million in productivity savings and, excluding the impact of the bank levy, expects to deliver positive ‘jaws’. The Australian and New Zealand economies remain resilient with solid growth supported by strong population growth and low unemployment. Australian business conditions rose again in the June quarter to their highest level since early 2008, with broad based strength across industries. However, the household sector faces some challenges with high levels of household debt, muted wages growth and subdued consumer sentiment.


CET1 Ratio (%); (Source: Company reports)
 
H1FY17 earnings led by decline in losses from discontinued operations: For H1FY17, NAB reported a 2.3% increase in cash earnings on the back of lending and trading income, while there was a 0.8% rise in costs owing to higher redundancy and general expenses (technology depreciation costs). The total bad debt increased by $19 million to $394 million and included an increase in provision overlays of $89 million for potential risks relating to the commercial real estate portfolio. Further, net interest margin fell by 11 basis points. Banks Common Equity Tier 1 (CET1) ratio stood at 10.1% as at 31 March 2017, which is an increase of 42 basis points in H1FY16.  The statutory net profit was $2.5 billion against the loss of $1.7 billion for the first half of fiscal 2016, led by reduced losses from discontinued operations. The consumer bank earnings maintained stability while there was a boost in earnings growth from the corporate and institutional bank (cash earnings surged 18%) driven by increased operating income. There was also a rise in customer deposits by 6.1% over prior corresponding period. Recently, Moody’s has downgraded the long-term ratings of NAB to Aa3 from Aa2 and the outlook was revised to stable from negative.


H1FY17 Group financial performance; (Source: Company reports)
 
Improving performance in Corporate & Institutional Banking: During H1FY17, Business & Private Banking cash earnings grew by 2.5% to $1,368 million led by strong revenue growth and tight cost management, partly offset by higher B&DD charges. While NIM improved, lending growth in specialized businesses such as Health and Agribusiness was strong during the period. However, Consumer Banking & Wealth cash earnings were stable at $764 million impacted by higher funding costs, increased competition in home lending, and reduced Wealth income. NIM stabilized compared to the September 2016 half year and recent home lending market share trends are improving. Corporate & Institutional Banking (CIB) cash earnings rose 17.9% to $791 million, and strong result was underpinned by a disciplined focus on returns. Over the year to March 2017, CIB delivered strong revenue growth with lower B&DD charges and a $15 billion reduction in risk weighted assets.


Segment wise earnings contribution; (Source: Company reports)
 
Costs and credit quality: However, there has been a rise in costs for the half year by 0.8% owing to higher redundancy and general expenses (technology depreciation costs). Further, total bad debt charges were up $19 million to $394 million on the prior corresponding period and include an increase in provision overlays of $89 million for potential risks relating to the commercial real estate portfolio. On the other hand, the Group maintains a well-diversified funding profile and raised $18.8 billion of term wholesale funding in the March 2017 half year across a range of markets. The weighted average term to maturity of the funds raised by the Group over the March 2017 half year was 5.4 years, while the net stable funding ratio (NSFR) was 108% at 31 March 2017.
 
FY16 was driven by increased volumes in housing and business lending: For FY16, on a statutory basis, net profit of NAB decreased by $5,986 million or 94.4% compared to 2015, largely driven by the increased loss on discontinued operations during 2016. Net interest income increased by $468 million or 3.8% compared to 2015. Excluding foreign exchange rate movements, net interest income increased by $450 million or 3.6%, including a decrease of $107 million which was offset by movements in economic hedges in other operating income. The underlying increase was largely driven by increased volumes in housing and business lending and deposits combined with benefits received from the repricing of lending and deposits. However, these were partially offset by higher funding costs and competitive pressure on housing and business lending margins. The Group’s net interest margin fell two basis points from 1.90% to 1.88% in 2016 mainly due to higher funding and liquidity costs, due to higher wholesale funding costs, partially offset by benefits received from repricing.


FY16 financial performance; (Source: Company reports)
 
Completion of major divestments in FY16: Net investment and insurance income decreased 7.7% yoy to $54 million and margins decline was driven by MySuper plan transitions and a change in business mix to lower margin wholesale and institutional products, consistent with broader industry. Total other income decreased by $729 million or 13.8% compared to 2015. Excluding foreign exchange rate movements, other income decreased by $737 million or 14.0%. This result includes an increase of $107 million due to movements in economic hedges, offset in net interest income. Further, the underlying decrease was driven by lower trading performance and sales of risk management products to the Group's customers, movements in fair value and hedge ineffectiveness and one-offs in the September 2015 full year relating to the settlement of a long standing legal dispute, combined with the sale of loans in NAB UK CRE and assets in Australian Banking, that were not repeated in the September 2016 full year. Importantly, FY16 has been a milestone year for the Group with the completion of major divestments including the demerger of CYBG and the sale of 80% of NAB Wealth's life insurance business to Nippon Life.
 
Stock Recommendation: The stock has moved up 15.2% in last one year, while it is down 5.8% in the last six months (as on September 17, 2017), owing to the headwinds prevailing in the banking sector. Given the improving asset quality, stable net interest margins and robust balance sheet and liquidity position with diversified business portfolios, we give a “Buy” recommendation on the stock at the current price of $31.20


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 do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations