Quality Issues

National Australia Bank posted first-half FY17 cash earnings of $3.294 billion, in line with Ord Minnett’s forecast of $3.285 billion, driven by a stronger-than-expected trading performance. The interim dividend was $0.99 per share, in line with forecasts and representing a payout ratio of around 80%.

 

Operationally, the net interest margin was flat. However, with volumes below expectations and expenses above forecasts, the overall outcome was saved by arguably lower-quality items of higher trading gains and slightly lower provisioning. In particular, we note expenses growth increased to circa 6% on an annualised basis, after having contracted in absolute terms in the second half of FY16.

 

Although the market paused for relief on a flat margin outcome, NAB’s result was symptomatic of the position of the whole sector at the moment – an absence of earnings growth, and in a holding pattern waiting to see if recent re-pricing initiatives flow through to an improved second-half net interest margin, or whether they are competed away.

 

For NAB specifically, if the ‘glass half full’ approach to an expected resumption of growth is not forthcoming, their ‘positive-jaws’ mentality will be under siege from a building software amortisation charge.

 

The significantly improved capital position – the core equity tier-one ratio is now at 10.1% – over the last two halves sees a wind-back of our dividend reinvestment plan assumptions to take the pressure off a building share count. We note, however, that the reduction in NTA per share in the first half of FY17 to $15.90 from $16.06 does hold back valuation prospects somewhat.

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