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) had released a straightforward fiscal 2017 result with indication of a long-term earnings upside at the back of key strategic initiatives. The group flagged for expediting investment with an additional $1.5 billion slated for the next three years. Further, NAB’s strong franchise in Australia and New Zealand with an ability to generate resilient earnings coupled with solid capital levels and better funding profile seem to augur well with the strategy.

Royal Commission into the Australian financial services sector: Securities of National Australia Bank Ltd (ASX: NAB) as other Australian Banks’ stocks were down with the government announcing for a Royal Commission into the alleged misconduct of Australia’s banking and financial services sector. This step was undertaken by the government to ensure that the financial system is working efficiently and effectively. While some challenges are erupting owing to this move, the bank still looks resilient in terms of efforts at other ends.

Reshaping the business to perform: In FY17, NAB had launched seven Customer Journeys aimed to drive customer advocacy through enhanced efficiencies and improved interactions with the customers. This includes a new 10-minute digital transaction account onboarding for the business customers with simple needs, which will significantly reduce the processing time for onboarding new customers and removing the need for a customer to visit a branch. Faster, easier application process is made for Everyday Accounts, and this is reducing the application time to seven minutes. The bank has created simplified digital Superannuation portal to help customers better understand their retirement options and e-forms pre-populated with the existing customer data. The bank made a virtual banking assistant pilot for business customers using artificial intelligence chat technology, which will help customers fulfill simple needs through self-service. Moreover, NAB is enhancing its products and services for customers through digitization and innovation. NAB is also exploring new strategic alliances and direct equity investments through the bank’s dedicated innovation fund, NAB Ventures, to fast-track improvements in customer experience and leverage innovative new technologies and business models.

Operating Performance in FY17: In FY17, the revenue grew 2.7% with the growth in housing and business lending, and stronger Markets & Treasury income. The Net Interest Margin fell 3 basis points (bps), or up 1 bp excluding Markets & Treasury. NAB’s expenses went up 2.6%, or 1.5% excluding redundancies, due to increased investment partly offset by productivity savings. Moreover, in FY17, NAB has posted $5285 million of statutory profit and 2.5% increase in the cash earnings. The bank had declared total dividend of 198 cents per share in FY17. As per their Consumer Banking and Wealth business, cash earnings enhanced $68 million or 4.3% boosted by balance sheet growth and repricing. Business and Private Banking segment’s cash earnings surged 6.3% despite rising expenses from ongoing investment in technology and increasing charges for bad and doubtful debts from higher write-backs recognized in 2016. Corporate and Institutional Banking segment’s cash earnings enhanced 12.3% boosted by falling charges for bad and doubtful debts and productivity and FTE savings. NZ Banking cash earnings rose $78 million or 9.7% boosted by housing and business lending.
 

FY17 Highlights (Source: Company Reports)
 
Complying with APRA’s requirements: The bank remained well capitalized and expects to meet APRA's new ‘unquestionably strong’ capital requirements in an orderly manner by January 01, 2020. The Common Equity Tier 1 (CET1) ratio as at 30 September 2017 was 10.1%. Moreover, NAB has maintained strong liquidity through the FY17 with a quarterly average Liquidity Coverage Ratio (LCR) of 123%, which is above the APRA requirement of 100%. The Net Stable Funding Ratio (NSFR), as at September 30, 2017, was 108%, which is above the APRA minimum regulatory requirement of 100% from January 2018. Moreover, NAB has internationally comparable CET1 ratio of 14.5% and Leverage ratio (APRA basis) of 5.5%. Overall, the credit risk in the NAB’s portfolio remains sound, and bad and doubtful debts are stable.

Improving Asset Quality in FY17: NAB’s bad and doubtful debt (B&DD) charges increased 1.3% to $810 million, but as a percentage of gross loans and acceptances declined 1 bp to 14 bps. The charge includes additional collective provision (CP) overlays of $249 million for potential risks mainly relating to commercial real estate, retail trade and mortgage portfolios. Moreover, the Asset quality has improved with the ratio of 90+ days past due and gross impaired assets to gross loans and acceptances down 15 bps to 0.70% benefitting from better conditions for New Zealand dairy customers and successful work-out strategies across the Australian business lending portfolio.
 

Asset Quality (Source: Company Reports)
 
Long term Strategy: NAB has planned an estimated $1.5 billion increase in investment over the next three years and has a key focus to drive a major uplift in innovation and capabilities in the Group’s leading Australian SME franchise. NAB is currently targeting Cumulative cost savings at greater than $1 billion by 30^th September 2020, as the bank is significantly simplifying and automating processes, which reduces procurement and third-party costs, and brings the bank closer to its customers with a flatter organizational structure. Moreover, increased revenue from higher customer retention and targeted market share gains and reduced operational and regulatory risks from a simplified, more responsive and resilient technology environment are among the key focusses. Furthermore, NAB is reshaping its workforce to enable it to deliver for its customers and expects to create up to 2,000 new jobs by 30 September 2020, while about 6,000 roles will be impacted as the group further automates and simplifies its business. This will result in a net reduction in staff currently targeted at approximately 4,000 by 30 September 2020, which is expected to give rise to a restructuring provision of $0.5-0.8 billion in the first half of the FY18.
 

Key Targets (Source: Company Reports)
 
Focusing on customer service: The group continues to focus on customers in Priority Segments Net Promoter Score. Their QuickBiz product, is the first of its kind in Australia to offer a complete suite of unsecured, self-service digital financing facilities. They expanded their HICAPS health offering to deliver a digital platform, meaning patients can now locate a practitioner, get a quote, pay for their consultation and claim their private health insurance benefit in one mobile app. The bank also partnered with realestate.com.au to combine searching for property and getting a home loan to enable an improved home buying journey. The bank also simplified their standard business contracts benefitting more than 130,000 Australian businesses. The bank’s NAB Assist, is a dedicated specialist which helped nearly 20,000 Australians who were facing challenges with around 90% back on track with their payments within 30 days. The bank’s partnership with Good Shepherd Microfinance has supported over 500,000 people with microfinance loans since 2005. They are aiming for quadrupling their annual target for new microfinance loans to 100,000 within two years, as part of the commitment to boost performance.

Settlement of Bank Bill Swap Rate (BBSW) legal action: The bank has agreed for a settlement with the Australian Securities and Investments Commission (ASIC) relating to the Bank Bill Swap Rate (BBSW) legal action. The legal action was related to trading in the bank bill market in the period from June 2010 to December 2012. The settlement was lately approved by Federal Court. As part of the settlement, NAB agreed to pay a $10 million penalty and ASIC’s costs of $20 million. NAB will also make a donation of $20 million to a financial consumer protection fund nominated by ASIC, which was supposed to be reflected in FY17 results.
 

Annual Dividends (Source: Company Reports)
 
Stock Performance: NAB stock has fallen 5.7% in last one month (as at December 08, 2017) owing to certain challenges in the banking sector, while the group has continued to shift its portfolio towards businesses with higher returns. NAB delivered a cash ROE of 14.0% on a continuing operations basis for year ended in September. The bank is aiming to have number 1 NPS among Australian major banks for the priority segments. The Cost-to-income ratio is expected to be 35%. Given the on-going efforts and resilient performance, we put a “Buy” recommendation on the stock at the current price of $29.81


NAB Daily Chart (Source: Thomson Reuters)

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