Cash Call

National Australia Bank reported first-half FY20 cash earnings of $1.436bn, 10% below Ord Minnett’s forecast. We note the following key points from the result:

 

  • Excluding one-off items, net profit fell 24% half-on-half (HoH).

     

  • Net interest income of $6.886bn was up 1% HoH, on an unchanged net interest margin (NIM) and modest credit growth, with average interest-earning assets growing less than 1%.

     

  • Treasury and markets income was much weaker this half, down 31%, and well below our expectations.

     

  • Costs were largely in line with our estimates, and were slightly higher HoH on an ex-one-offs basis (up 0.4% HoH).

     

  • As we had expected, bad and doubtful debts were much higher, increasing to $1.161bn.

     

  • One off charges were in line with guidance.

 

Overall, the operational result was solid again with NIM unchanged, costs on track to hit guidance of flat for the full year, and only non-interest income missing our forecasts.

 

NAB’s drip feed of capital raisings through partial dividend reinvestment plan underwritings and preference share conversion over recent halves has proven insufficient, with the bank launching a $3bn institutional placement at $14.15 per share and a $500m share purchase plan.

 

It is clearly disappointing to see NAB adding an additional 7% to its share count at a discount to tangible book value, but the pro-forma common equity tier-one (CET1) ratio of 11.2% puts NAB on a much firmer footing to deal with the impact of the current downturn. Nonetheless, its own guidance on pro-cyclicality of capital (an 80bp to 180bp CET1 ratio hit over two years) suggests it could still dip below the Australian Prudential Regulation Authority’s (APRA) 10.5% benchmark over the next 12–18 months.

 

Significant uncertainty is likely to weigh on the sector, but in our view NAB has a solid platform in place. We maintain our Accumulate recommendation, while we have lowered our target price to $18.00 from $20.00.

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