Revenue Resilience

NAB delivered 3Q19 unaudited cash earnings of $1.65bn, up 1% on the quarterly average of 1H19 excluding remediation costs. This was broadly in line with the run-rate inferred from our previous 2H19 estimate of $3.343bn excluding one off items, on slightly weaker revenue growth, and an in-line cost performance. Bad and doubtful debts (BDD) declined to $247m in the quarter (roughly half our estimate for 2H19), while debts of 90-plus days past due (90+ DPD) and gross impaired assets (GIA) as a proportion of gross loans and acceptances (GLA) increased to 85bp.


NAB’s 3Q19 revenue growth was slightly softer than we had forecast, but we expect its revenues will continue to show greater resilience than that of its peers, reflecting the strength of its small- and medium-sized enterprise (SME) franchise. Management noted the net interest margin (NIM) was higher over the quarter, due to lower short-term funding costs, which we estimated added around $25m, with a similar benefit to flow through in the September quarter. Acting against this, the June and July Reserve Bank of Australia (RBA) rate cuts will remain a headwind to the NIM. We note we have incorporated a further 25bp cut in the cash rate by the RBA in early CY20.


Corporate asset quality trends deteriorated modestly. NAB noted that asset trends remained sound over the quarter, with BDD declining to $247m. However, there were some signs that asset quality is beginning to normalise off its lows, with an increase in the 90+ DPD and GIA/GLA ratio, including a modest deterioration in its corporate portfolio.


We have reduced our cash net profit forecasts by just 1% across FY19–21. We have trimmed our 2H19 underlying net profit forecast and increased our estimate of pre-tax remediation costs to $500m from $430m for conservatism. Our underlying net profit forecasts for FY20 and FY21 have been trimmed by 1% as we factor in a further cash rate cut in 1H20. We have also pared back our forecast for fees and commissions.


NAB has now put together several years of ‘boring’ trading updates (i.e. lacking the earnings volatility of the past), which is why we think it deserves to trade on a higher multiple than it has historically. From here, we expect that NAB will show more resilient revenue trends than its peers, while its strong position in the small business space should continue to differentiate it from rivals. At around 12.6x one-year forward earnings, NAB’s valuation looks attractive. NAB is our top pick in the sector and we retain our Accumulate rating and $29.60 target price.

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