Divergent Views On National Australia Bank

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National Australia Bank has prevailing themes in common with its major peers yet brokers diverge in their views on the outlook for the stock.

-Support from strong position in SME and growth profile in New Zealand
-Lower exposure to mortgage lending helps margins
-Yet pre-provision profit per share has been falling since 2008
 

By Eva Brocklehurst

While National Australia Bank ((NAB)) may have performed better than some of its peers in the recent results season, brokers concur the outlook is hardly stellar. Retail banking was strong, net interest margins were flat, while asset quality trends worsened.

There were trends in common with major bank peers, particularly as the sector is thwarted by low interest rates. These headwinds appear less severe at NAB, Ord Minnett believes, and the bank is performing relatively better on many counts, with the exception of mortgage growth.

Underlying net interest margin trends were relatively resilient in FY19 and Ord Minnett expects this to continue in the near term, given a lower exposure to mortgage lending. The bank's strong position in small to medium enterprises (SME) and a growth profile in New Zealand should deliver better growth in earnings per share vs peers over the medium term, and the broker asserts this is more important than debates over whether immediate capital settings are right.

Citi lauds the execution on a three-year restructuring plan and early action on compliance expenditure issues. The broker believes the outlook is comparatively better in terms of revenue, costs growth and implied returns.

Ord Minnett acknowledges some investors may be disappointed the bank did not specifically address the issue of capital in its results but suggests this could be explained by the long five-year phasing-in of the Reserve Bank of New Zealand rule changes.

Bell Potter, not one of the seven brokers monitored daily on the FNArena database, agrees the bank showed strength in areas where it has had a competitive advantage over its peers historically, such as SME and global infrastructure lending.

Stable revenue from strong housing and business lending volumes provided a positive aspect and cost discipline was also a highlight, as the bank achieved its underlying cost target of around $8.1bn. Bell Potter notes, when excluding large items, such as the $832m in remediation provisions and a $348m after-tax software capitalisation charge, the performance was notably stronger.

The broker, not one of the seven monitored daily on the FNArena database, has a Buy rating and $30.50 target but acknowledges the results were "noisy" because of large notable items and this dragged cash earnings down by -28% over FY19.

One-offs

The bank envisages a path to a CET1 ratio that is north of 11%, comparable with peers, UBS observes. However, this is predicated on nothing going wrong, and NAB has a track record for one-off losses. Moreover, with a new CEO on board, the broker would not be surprised if there were further restructuring provisions,write-downs, remediation charges or compression of mortgage spreads.

UBS assesses NAB has been "stuck in a rut", with falling pre-provision profit per share since 2008, and believes this metric will continue to deteriorate, as revenue is under pressure, there is a flat cost base post restructuring and a rising share count.

To Macquarie, NAB appears to be the only major bank looking to contain expense growth. This may be a good target but the broker suspects the bank will run out of steam. Over FY19 there were benefits from investment, restructuring charges and capitalised software write-offs. Still, it will be difficult to reduce expenditure further without incurring additional upfront costs and Macquarie envisages downside to market expectations in this regard.

NAB has reaffirmed its intention to exit MLC Wealth in FY20, planning to explore transaction structures and options. Shaw and Partners suspects the declining revenue and profit profile of this area of the business will present a challenge. The MLC profit contribution in FY19 fell to $176m from $250m.

The bank has estimated it will raise $900m from its dividend reinvestment plan and around $700m from a partial underwriting. Bell Potter notes with relief there was no capital raising announced and the final dividend was unchanged.

The broker calculates the pay-out ratio is around 71%, excluding large items. This is only marginally above the 70% considered a sustainable ratio and is one that would be sufficient to generate surplus capital.

Credit Suisse is not convinced, believing the outlook is not dissimilar from that of Westpac ((WBC)), given the "stifled" balance sheet. On the other hand, in FY20, Citi estimates NAB will record a 12% return on equity, well ahead of both Westpac and ANZ Bank ((ANZ)).

FNArena's database has two Buy ratings, three Hold and two Sell. The consensus target is $27.33, suggesting -5.7% downside to the last share price. The dividend yield on FY20 and FY21 forecasts is 5.7%.

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