Stocks’ Details
 

National Australia Bank Limited

Completion of Equity Raising: National Australia Bank Limited (ASX: NAB) provides banking, financial and related services. The market capitalisation of the bank stood at ~$62.28 Bn as on 18^th June 2020. Recently, the bank has issued A$205,000,000 subordinated notes due on 9^th June 2035 with respect to US$100,000,000,000 global medium-term note programme. The bank has also completed its share purchase plan (SPP) and raised $1.25 billion. NAB increased the SPP size by $750 million above its original target of $500 million, considering the strong support showcased by eligible shareholders. Previously, the bank also finished the institutional placement of $3 billion. The capital raised from the SPP and the institutional placement would assist NAB to navigate through a range of possible scenarios related to the COVID-19 pandemic, including a prolonged and severe economic downturn.

During 1H FY20, the company reported a decline in net interest margin of 1 bps to 1.78%. This reflects repricing in the home lending portfolio offset by a lower earnings rate on deposits and capital considering the impact of a low-interest rate environment, combined with competitive pressures. NAB reported statutory net profit amounting to $1,313 million and Group Common Equity Tier 1 (CET1) ratio of 10.39%.


CET1 Ratio (Source: Company Reports)

Focus for Future: The bank is optimistic about opportunities to grow its business in the future. NAB is making the decisions for the long-term to deliver sustainable outcomes for its stakeholders.

Valuation Methodology: P/BV Multiple Based Relative Valuation (Illustrative)

P/BV Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Key Risks: NAB is exposed to credit risk, which arises from the climate change, including extreme weather events affecting property values or business operations. NAB's business is also sensitive to market risk, associated with the loss from trading activities due to adverse movements in market prices of financial instruments, and operational risk, resulting from inadequate or failed internal processes, people, systems or external events.


Stock Recommendation: The bank possesses strong liquidity and funding position with a liquidity coverage ratio of 136% and Net Stable Funding Ratio 116%, which are well above regulatory requirements. We have valued the stock using Price to Book Value multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in percentage terms). For the purpose, we have taken peers such as Westpac Banking Corp (ASX: WBC), Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group Ltd (ASX: ANZ). Therefore, considering the strong liquidity and funding position, recent capital raising, and opportunities in the future, we give a “Buy” recommendation on the stock at the current market price of $18.780 per share, down by 0.949% on 18^th June 2020.

Westpac Banking Corporation

A Look at 1HFY20 Results: Westpac Banking Corporation (ASX: WBC) is a well-known bank of Australia, which provides banking, financial and related services. The market capitalisation of the bank stood at ~$65.55 Bn as on 18^th June 2020. The bank recently announced that it has completed the institutional offer of 31 million shares in Pendal Group Limited at a price of $5.98 per share. Following the settlement of the offer, WBC will complete the sale of its proprietary shareholding in Pendal. In another update, the bank announced that it has filed its Defence to AUSTRAC’s Statement of Claim, in which it admitted to a substantial majority of the contraventions alleged by AUSTRAC.

The results for 1H FY20 have been tough for the bank in its history. These results were impacted by higher impairment charges due to COVID-19, and the notable items, including the AUSTRAC provision. WBC reported statutory net profit amounting to $1,190 million, reflecting a fall of 62% on pcp. The bank experienced a rise in net interest margin of 1bps to 2.13%. The Board of the bank has deferred the decision on determining an interim dividend, and no dividend will be paid in June 2020.


Key Financials (Source: Company Reports)

Future Aspects: The bank would continue to bias long-term strength and expects various headwinds on earnings. WBC is building for the longer-term mainly via resetting the cost base for a simpler organisation.

Valuation Methodology: P/BV Multiple Based Relative Valuation (Illustrative)

P/BV Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Key Risks: As of now, a major risk for the bank is the AUSTRAC matter, which is likely to increase impairment charges of the bank. The bank is also working towards non-financial risk management. Increased environmental regulation, rising costs and reduced global purchasing power due to the COVID-19 pandemic are expected to pose challenges.

Stock Recommendation: Despite the tough results due to COVID-19, the bank maintains a strong balance sheet with a rise of $19 billion in customer deposits during 1H FY20. Currently, the bank is well capitalised and its liquidity and funding metrics are comfortably above regulatory requirements. We have valued the stock using Price to Book Value multiple based illustrative relative valuation method and arrived at a target with an upside of lower double-digit (in percentage terms). For the purpose, we have taken peers such as National Australia Bank Ltd (ASX: NAB), Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group Ltd (ASX: ANZ), etc. Thus, in light of decent liquidity and funding metrics, strong balance sheet and growth in customer deposits, we give a “Buy” recommendation on the stock at the current market price of $18.090 per share, down by 0.331% on 18^th June 2020.

Australia And New Zealand Banking Group Limited

Sale of Asset Finance Business: Australia And New Zealand Banking Group Limited (ASX: ANZ) provides banking and financial products and services to individual and business customers. The market capitalisation of the bank stood at ~$54.34 Bn as on 18^th June 2020. Recently, the bank announced the sale of its asset finance business “UDC Finance” in New Zealand to Shinsei Bank Limited for a consideration of NZ$762 million. This sale provides ~A$439 million of Level 2 Group CET1 capital at settlement. However, the transaction is subject to regulatory approval and completion is anticipated in the 2H CY20.

During 1H FY20, the bank reported statutory profit after tax amounting to $1.55 billion with a fall of 51% over pcp, primarily due to credit impairment charges of $1.674 billion which included increased credit reserves of $1.031 billion for COVID-19 impacts. Lower interest rates have impacted its institutional businesses, especially in payments and cash management. ANZ entered the crisis with a strong capital position and its Common Equity Tier 1 Capital Ratio stood at 10.8%. 


Financial Performance (Source: Company Reports)

Future Focus: ANZ continues to focus on strategic clarity, prudent risk settings, and execution discipline. The bank would maintain its focus on productivity, considering the impact of COVID-19 on its operations. ANZ is committed to its $8 billion cost ambition.

Valuation Methodology: P/BV Multiple Based Relative Valuation (Illustrative)

P/BV Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Key Risk: ANZ's business is exposed to liquidity and funding risk, which arises due to the inability of the group to address its payment obligations. To manage this risk, the bank is maintaining a strong structural funding profile and a portfolio of high-quality liquid assets. The bank is also exposed to the risk of maintaining adequate capital level required by regulators and other stakeholders. Other risks may include, credit risk associated with lending to customers and market risk with respect to changes in interest rates, foreign exchange rates, volatility, etc.

Stock Recommendation: During 1H FY20, ANZ reported liquidity coverage ratio and a net stable funding ratio of 139% and 120%, which are well above the regulatory requirement. During 1H FY20, the bank reported an efficiency ratio of 59.0% as compared to the industry median of 73.7%. This reflects that ANZ has decent capabilities to convert its resources into revenues. We have valued the stock using Price to Book Value multiple based illustrative relative valuation method and arrived at a target with an upside of lower double-digit (in percentage terms). For the purpose, we have taken peers such as National Australia Bank Ltd (ASX: NAB), Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC), etc. Therefore, considering the strong liquidity and funding position, focus on productivity and robust capital position, we give a “Buy” recommendation on the stock at the current market price of $19.080 per share, down by 0.418% on 18^th June 2020.

 
Comparative Price Chart(Source: Refinitiv, Thomson Reuters)

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