Treasure Chest: New CEO Holds Key To NAB

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FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Several brokers suggest National Australia Bank's new CEO may be arriving at just the right time to steer improvements in the retail and business bank.

-New CEO will review retail banking strategy
-To maintain flat costs further reinvestment considered likely
-Branch closures considered a distinct possibility
 

By Eva Brocklehurst

Productivity and efficiency have not been the hallmarks of National Australia Bank's ((NAB)) retail and business banking performance, in Bell Potter's view. Is this about to change?

The broker estimates net interest margins lag peers by -36-73 basis points for the retail bank and by -8-23 basis points in the business bank. One small positive is that ANZ Bank ((ANZ)) and Westpac ((WBC)) are not much better when it comes to productivity.

The broker notes incoming CEO Ross McEwan is emerging from a successful stint at Royal Bank of Scotland, where several trends turned positive under his leadership. This provides a good indication of, in the broker's words, "what can go right for NAB over the next few years".

Morgan Stanley agrees Ross McEwan will be prioritising 2020 targets and restoring regulatory and community trust. The retail bank strategy will also be reviewed in a lower interest-rate environment.

The challenges for NAB appear more manageable versus Royal Bank of Scotland as well, as Bell Potter notes there is no Brexit scenario and interest rates remain positive, while asset quality is "stable".

Asset Quality

However, UBS disagrees, believing a deterioration in NAB's asset quality, revealed at the August update, requires close attention, especially as higher mortgage delinquencies were not observed in the recent Commonwealth Bank ((CBA)) results.

Morgans attributes a higher trend in Australian mortgage delinquencies to the switch to principal & interest home loans from interest-only loans, and the longer time being taking for those in arrears to sell their houses.

The broker suggests the major banks are focused on risk-adjusted returns in the institutional space, which bodes well for sector returns as well as CET1 ratios. There is a continued downtrend in risk-weighted assets, largely the result of lower domestic and offshore interest rates.

Rising impairments are also of most concern for Macquarie, particularly in the context of improving trends at Commonwealth Bank. The broker understands this disparity may be partially attributable to differences in hardship recognition and slower book growth but, on face value, the trend indicates underlying conditions remain challenging.

Given subdued volume trends and the focus on expense management, Macquarie does not expect a material earnings contribution from growth in FY19 and calculates the bank will recognise a $600m remediation charge in the second half.

Ross McEwan is likely to deliver on cost guidance yet Morgan Stanley suspects, in order to maintain flat costs, further reinvestment will be required, while there is potential for another restructuring charge of over $500m and for annual investment expenditure to remain above $1.5bn.

Branch Closures

The main driver of value for NAB is likely to be branch closures, as Bell Potter notes Royal Bank of Scotland shut down more than one third of its UK branch network.

NAB's 719 Australian branches cost an average of $3.4m per annum to operate and the closure of 13% would save $300m per annum pre-tax, on the broker's calculations. Under a closure scenario of 20%, this would save $480m.

Given the attractive prospect of cost reductions, Bell Potter, not one of the seven stockbrokers monitored daily on the FNArena database, reaffirms a Buy rating and $30.80 target. The broker notes there are also further opportunities to be found in strengthening the revenue base through margin and non-interest income discipline that should narrow the gap with major bank peers.

Ord Minnett, too, expects National Australia Bank will show more resilient revenue trends versus its peers, while its strong position in small business should be a differentiating factor.

There are three Buy ratings, three Hold and one Sell (UBS) on the database for National Australia Bank. The consensus target is $26.93, signalling -7.6% downside to the last share price. Targets range from $23.00 (UBS) to $29.60 (Ord Minnett).

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