Raising Fears Allayed

National Australia Bank reported a second-half cash net profit from continuing operations of $2.143bn, 2% below Ord Minnett’s forecast and consensus. A fully franked final dividend of 83cps was declared, taking the full-year payout to 166cps. Excluding one-offs, revenue was flat while expenses rose 1%, which delivered a 1% decline in underlying pre-provision operating profit growth. This compared to -4% for ANZ Bank (ANZ, Hold), and -1% for Westpac (WBC, Hold).


NAB’s underlying net interest margin (NIM) trends were relatively resilient (NIM was flat half-on-half, excluding the markets division), and we expect this resilience to continue in the near term given the bank’s smaller replicating portfolio and lower exposure to mortgage lending. FY20 cost guidance was unchanged at “broadly flat” despite a $250m increase in regulatory and compliance costs since FY17.


Capital was softer than we expected, with NAB’s common equity tier-1 ratio of 10.4% flat half-on-half versus consensus at 10.5%. NAB will deal with the need to build capital by partially underwriting its forthcoming final dividend (to 70%).


The result demonstrated common trends with major bank peers that have already reported, with revenue coming in about 1% below our forecast due to a greater net interest margin decline than expected. The company’s outlook is also clouded by the low-interest-rate environment, which is putting increasing pressure on sector returns. These headwinds are less severe at NAB, in our view, and the bank appears to be executing well in all key segments, with the exception of a bump in the road on mortgage growth this half.


We expect NAB’s strong positioning in the small to medium enterprise segment, growth profile in New Zealand, and return on equity focus in the institutional business to deliver better EPS growth than that of peers over the medium term. We see this as more important than debates over whether immediate capital settings are right.


NAB remains our preference among the major banks and we maintain our Accumulate recommendation, although we have trimmed our target price to $29.30 from $29.50 due to changes to our earnings forecasts.