National Australia Bank
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Huge provision charges related to Clydesdale Bank, offset the improved earnings: National Australia Bank Ltd. (ASX: NAB) witnessed a 4% yoy revenue increase for the third quarter of 2015, despite the challenging market conditions. The group’s cash earnings increased over 9% on a year over year basis to $1.75 billion during the quarter. Cash earnings rose 6% as compared to the quarterly average of the March 2015 Half Year performance. The bank reported a $1.85 billion of net profit attributable to the owners of the group on a statutory basis (includes treasury shares, and fair value and hedge ineffectiveness). NAB’s charge for Bad and Doubtful Debts also dropped by 15% on a year over year basis to $193 million due to the lower charges in Australian Banking. On the other hand, UK Prudential Regulation Authority (PRA) reported that NAB needed to provide £1.7 billion capital support to Clydesdale Bank associated with the possible future legacy conduct costs to realize the proposed demerger and IPO of that business, during its March 2015 half year results. Moreover, the bank expects to incur further charges in the range of £290 million to £420 million during the full year 2015 results.
Credit provisions and losses (Source: Company Reports)
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Outlook: National Australia Bank shares corrected over 13.8% in just last four weeks (Aug. 5 to Sep. 4) as the management reported that it estimates to incur an extra £500 million due to UK operations impact, raising concerns on its full year of 2015 results. On the other hand, the bank has already diverted over a £1.7 billion funds under its conduct mitigation package. The group delivered a decent June quarter performance, despite raising its CET1 ratio by 107 basis points to 9.94% as at June 2015 to comply with the APRA regulations. The recent correction has placed the National Australia Bank at attractive valuation as compared to its banking peers, which is trading at a cheaper P/E of 12.6x. The group has a robust dividend yield of 6.6% while its return on equity is 10.9%. Based on the foregoing, we give a “BUY” recommendation to National Australia Bank at the current stock price of $29.61
Australia and New Zealand Banking Group
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Launched super-regional strategyto boost Asian Business: Australia and New Zealand Banking Group (ASX: ANZ) is increasing its focus on Asian business and accordingly launched a “super-regional strategy” program. Management also reiterated the China’s growth outlook over 7% to 7.5% per year, addressing the investors’ concern.The bank recently entered into a $450 million technology deal with IBM for five years, wherein IBM would be offering technology to support its super-regional Asian strategy. Meanwhile, ANZ’s global markets business income surged 6% yoy to $1.8 billion during the nine months ended on June 30 of fiscal year of 2015, while the customers for International and Institutional Banking improved by 9% on a year over year basis, enhanced by Asian business. Cross border payments represented over 25% of the institutional total customer revenues as of first half of 2015.
Financial performance (Source: Company Reports)
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Outlook: The shares of ANZ slumped 18.1% in last four weeks (Aug 5-Sep 4) partly attributed to the slowdown in China. The stock also got impacted by the group’s capital raising efforts to meet the CET 1 ratio standards set by APRA. The group made a $2.5 billion Institutional placement, to improve its CET-1 ratio for 2015 to 9.2% on a pro forma basis. Moreover, ANZ raised $500 million under the share purchase plan, subsequently increasing the CET1 Ratio by 13 bps to 9.3%. But the bank reported a decent performance with cash profit increasing by 4.3% yoy to $5.4 billion in the nine months ended on June 30 of fiscal year of 2015. The statutory profit rose by 11% yoy to $5.6 billion in 9M15, against $5 billion in pcp, driven by the better customer franchises across Australia, New Zealand and Asia Pacific.Customer deposits were strong, delivering 9.5% increase on a year over year basis, driven by net loans and advances rise by 7.7% yoy during 9M15. On the valuation side, the bank is trading at attractive P/E of 10.3x against its comparable peers like National Australia Bank Ltd. (ASX: NAB) P/E of 12.6x, Commonwealth Bank of Australia (ASX: CBA) P/E of 13.3x and Westpac Banking Corp (ASX: WBC) P/E of 12.5x. The bank is also a strong dividend player, with a yield of 6.7%. Accordingly, we reiterate our “BUY” recommendation on the stock at the current levels of $26.71
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