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Date : 28/02/2022

National Australia Bank

ASX :

NAB

Market Cap : $95.03 Billion

Dividend Per Share : $1.27

Dividend Yield : 4.39 %

Buy

52 Week Range : $24.41 - $30.98

Share Price : $28.91

NAB stands out from its peers by demonstrating solid operating capabilities, along with a healthy growth of its loan book. We recommend a long-term “Buy” for NAB.

Company Analysis

National Australia Bank’s (ASX: NAB) activities can be segmented into four distinct business divisions. The Company’s largest segment is Business & Private Banking, representing 39.58% of the Group’s revenue. Personal Banking comes into the second position with 23.8%, followed by New Zealand Banking and Corporate & Institutional bringing 18.34% and 18.27%, respectively. NAB’s revenue segments are evenly distributed among all its businesses which mitigates the risk of overexposure in a particular area.

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Source: NAB

NAB exhibits strong momentum supported by solid fundamentals

NAB shares shot to multi-year highs recently. The bank’s shares traded higher after a wave of fundamental momentum rests behind the Company, backed by analyst opinion and market sentiment. Since the start of the month, the NAB shares have gained more than 12.8% and have taken off in 2022.

Investors and analysts have been constructive on the NAB share price since the bank released its first-quarter update earlier this month. The key standout was the bank smashing estimates on cash earnings and faring better at its net interest margin level than the market expected.

So far, we are quite impressed by the bank’s results, particularly with the NAB’s “peer-leading” business which reported a 5% underlying growth.

NAB made headlines recently regarding its Project Carbon, newly renamed Carbonplace, during last week’s session. The market reacted as it appeared to be impressed by the platform attracting strong institutional interest, and Carbonplace will be trading carbon credits.

With a wave of fundamental momentum behind the Company, it appears sentiment will continue to be bullish for the NAB share price.

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Source: Tradingview

FY22 onward Outlook: NAB in its second year of implementation of its strategic ambition

NAB is in its second year of executing its “Group Strategy”, and we have seen strong momentum. We have seen clarity on NAB’s strategy, translating to early momentum in its core home and business lending. The bank exhibits strong foundations in place to keep this growth going. Thus, NAB has taken significant steps to simplify and strengthen its portfolio, including a few acquisitions such as the “86 400” and divestments such as MLC Wealth, both completed last year, along with the ongoing Citigroup’s Australian consumer business acquisition process.

A strength we have identified is NAB’s prudent capital management throughout the last two financial years, resulting in a strong balance sheet geared towards future growth. The bank’s engagement score is in the top quartile, reflecting the Group’s approach to supporting its customers and employees through COVID-19.

Investment Thesis

NAB reported solid operating performance for the first half of FY22 and was well-received by the market

NAB has started the 2022 financial year well. NAB’s cash earnings increased by 12% compared with the quarterly average of the second half of FY21. Also, asset quality remained benign and good momentum has continued across the bank’s business divisions despite the environment remaining competitive. Volumes have been strong over the quarter, with lending and deposits with each going up by $18 billion. In Australia, over the three months to December 2021, home lending grew by 2.6%, and SME business lending increased by 3.4%.

NAB gained market share across its core lending and deposit products. New Zealand loan growth was also strong at 2.2% over the same period. These results demonstrate NAB’s solid execution capabilities of the Company’s ongoing strategy, making the bank simpler for its customers and employees. This is evident as the improving customer net promoter scores in consumer and business over the first quarter of FY22, which are pleasingly no longer negative. Disruptions to supply chains and labour markets caused by the recent spread of the new COVID-19 variant “Omicron” still present challenges for some of NAB’s customers. Whilst this creates uncertainty, we remain optimistic about the outlook for Australia and New Zealand, and we believe NAB is well-positioned to continue to grow with a strong balance sheet and disciplined execution of a clear strategy.

Source: NAB

Compared with the second half of FY21 quarterly average, cash earnings increased by 12%, and cash earnings before tax and credit impairment charges increased by 13% despite a few drivers such as a slight decline in net interest margin and expenses that weighed on the revenue increase of 8%. Earnings growth resulted from higher volumes across housing and business lending, increased fees, commissions and the recovery in Markets & Treasury (M&T) income.

Net interest margin declined by 5 basis points to 1.64% due to competitive pressures and housing lending mix, partly offset by lower funding and deposit costs. The increase by 2% in expenses surely weighed on the margin, mainly reflecting higher salaries and leave costs, combined with investment to support growth, partly offset by productivity benefits. While the level of growth and emerging inflationary pressures present challenges, we remain confident that NAB would keep its target expenses broadly flat throughout FY22.

The return of dividends growth

The final dividend in respect of FY21 has been increased to 67 cents, 100% franked, payable on the 15th of December 2021. It is important to note that the extent to which future dividends on ordinary shares and distributions will be franked is not guaranteed and will depend on a few factors, including capital management activities and the level of profits generated by the Group that will be subject to tax in Australia. NAB periodically adjusts its Dividend Reinvestment Plan (DRP) to reflect its capital position and outlook. NAB expects to fully satisfy the DRP by an on-market purchase of shares.

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NAB has room to outperform its “big four” peers

We believe that the recovery will likely continue in CY22, with global economic growth expected to remain above its long-term trend. To this point, the recovery has been uneven. Some sectors may still struggle. Various central banks loosened monetary policy at the start of the pandemic, implementing a range of measures including policy rate cuts, asset purchases, funding programs and loan guarantees. With the recovery underway and a looming inflationary risk, central banks are preparing to eventually unwind unconventional monetary policy. Governments have implemented a broad range of fiscal programs to support businesses and households. Some governments have started to slow down support, and fiscal spending is likely to contract significantly soon. COVID-19 remains the main risk to the global economic outlook, with emerging market economies more exposed to the risk of outbreaks due to lower vaccination rates than advanced economies.

However, the recent development of the Russia-Ukrainian conflict emerged as the main catalyst of the moment. Investors are now closely assessing the equity market, which is already weakened by the anticipated rise of interest rates. The worst-case scenario could be Russia occupying most of Ukraine. This could lead to severe economic consequences and further slow the recovery of the global economy.

The outlook for the Group’s financial performance and outcomes is closely linked to the levels of economic activity in each of the Group’s key markets. We have based our valuation model on a conservative projection of NAB’s revenue growth considering all these aspects.

In our view, with the accommodative looming interest rates hike, NAB could benefit from it as the bank has a significant focus on Business Banking which represents a total loan of more than 42%. Furthermore, we believe NAB will also be able to leverage the housing cycle as the bank holds a substantial proportion of home loan products, totalling 57% of NAB’s loan book.

During the first quarter of FY22, NAB’s revenue went up by 8%. This resulted from an increase in lending volume across the bank’s mortgage and businesses loan. Despite the shrinking net interest margin which occurred across the industry, NAB was therefore not too affected and even reported a cash earnings growth of 12% for the quarter and is tracking ahead of the market’s earnings expectation for the first half.

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Source: Tradingview

Over the last twelve-month period, NAB has remarkably outperformed its peers. NAB shares gained more than 25%, whilst CBA, ANZ and WBC lagged behind.

Our earlier report on NAB can be viewed by clicking here.

Recommendation

NAB stands out from its peers by demonstrating solid operating capabilities, along with a healthy growth of its loan book. This will support the return of sustainable earnings growth, dividends growth, and solid cash inflows, making NAB a rock-solid long-term allocation for your portfolio. The strong momentum was reflected last week in the market as NAB share prices reached their 52-week high on the back of its earnings report. We recommend a long-term “Buy” for NAB.

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