Best in Class

Best in Class | National Australia Bank (ASX:NAB) Recommendation

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Ord Minnett Research Recommendation: National Australia Bank (ASX: NAB)

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National Australia Bank (NAB) reported an FY21 cash net profit of $6.56bn, slightly below OrdMinnett’s forecast. A 100%-franked final dividend of $0.67 per share was declared, ahead of ourestimate of $0.65, taking the full-year dividend to $1.27 per share.

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The second-half cash net profit was 3% below our forecast, driven by a 1% miss on revenue and0.5% miss on costs. A flat net interest margin (NIM) excluding markets/treasury and higher liquid assets was a good outcome, but there was more NIM pressure in the fourth quarter than we had anticipated. Even still, 2% half-on-half revenue growth excluding markets was a sound outcome, and period-end loan balances were 2% above our forecast, driving better than expected momentum into FY22. Markets income was soft, as forecast, but no worse than it speers, and rising volatility should see some improvement.

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NAB provided an update on the Australian Transaction Reports and Analysis Centre anti-money laundering (AML) investigation, but this remains an area of uncertainty. Importantly, management clarified it believes it can absorb business-as-usual AML systems investment in its cost guidance, i.e. FY22 costs flat year-on-year and lower absolute costs over FY23–25 versus the current $7.7bn base. Any remediation and/or penalty will be taken separately.

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During the second half, NAB took market share in Australian mortgages, small-and medium-sized enterprise banking and New Zealand banking, while the corporate and institutional banking division saw good loan growth with stable NIM. Management is confident of this growth continuing, including an improvement in home loans written in personal banking as ‘SimpleHome Loans’ are rolled out to brokers. We expect NIM performance to outstrip peers given NAB’s funding mix and execution ability.

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We have raised our pre-provision profit forecasts for FY22, and upgraded our FY22 and FY23estimates by 2% driven by a slight increase in markets income and a reduction in our cost forecasts. Our EPS forecasts have increased 3% given the reduction in impairment forecasts. Post the result, we see no reason to change our view that NAB offers the best risk-reward balance in the sector. We maintain our Accumulate recommendation and have raised our target price to $31.40 from $29.50.