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Date : 14/11/2022

National Australia Bank

ASX :

NAB

Market Cap : $98.87 Billion

Dividend Per Share : $1.51

Dividend Yield : 4.81 %

Buy

52 Week Range : $25.43 - $33.75

Share Price : $31.35

NAB is poised for another year of steady returns, benefitting from the rising interest rate environment. Overall, a strong business highly capable of maintaining its costs under control. We are reiterating a long-term “Buy”.

Company Analysis

The National Australia Bank (ASX: NAB) released its FY22 full-year results on Wednesday, November 9. The market reacted positively to the announcement during the day, closing Wednesday up 1.70%. At the time of writing, NAB shares are changing hands for $31.35. Despite its pullback from its recent high at $32.82, NAB shares remain in the positive territory year-to-date, gaining 7.32%. Despite the volatility, following the release of the Bank’s FY22 full-year results, NAB share price continues to exhibit resilience, given the current period of uncertainty. Thus, the Bank has outperformed the ASX 200 by more than 13.21%. The Benchmark has been in a downtrend since the start of 2022, down -5.88% year-to-date.

The last time we recommended NAB was earlier this year in February, whilst the Bank’s shares were priced at $28.91 apiece. NAB has delivered an 8.44% upside since our last report.

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Source: Tradingview

NAB: The second biggest among the big four

NAB is the second largest Bank among the big four in terms of market capitalisation, estimated at $98.87 billion, just behind the Commonwealth Bank of Australia (ASX: CBA), which market cap is around $179.48 billion. As the second largest financial institution in Australia, NAB provides financial services, including a range of banking and financial services, through geographically well-diversified branches across Australia, New Zealand, Asia, the U.K., and the U.S.

NAB’s Business and Private Banking division is the Company’s largest cash earnings contributor, almost half of the Bank’s cash earnings come from this segment. It is important to note that NAB has three priority customer segments, and this division plays a key role in serving their needs. These segments comprise small businesses, medium businesses, and investors. NAB has built an integrated model for its banking infrastructure. The banking platform is centred around a concept of locally managed business banking centres and via small business customer hubs, including specialists in Health, Agribusiness, Government, Education, Community and Franchising, Professional Services and Commercial Real Estate. On top of that, NAB is also offering a high-net-worth individuals wealth management service via its Private Bank and JBWere.

During FY22, the division reported strong earnings growth, driven by higher income from solid volume growth and higher margins. The performance was accentuated, as the Bank benefitted from lower credit impairment charges. However, the solid 21.5% year-on-year earnings improvement was partially offset by higher operating expenses, including additional bankers and resources to support growth, the impact of the LanternPay acquisition and investment in technology capabilities. The takeover of this digital claim payments platform will support NAB’s expansion into the healthcare, disability, insurance and aged care sectors.

NAB’s Corporate and Institutional Banking is the Group’s second-largest cash earnings contributor, bringing 22% of the Bank’s earnings. NAB provides a range of lending and transactional products and services through this business division. The Bank offers services related to debt capital markets, custody, and alternative investment solutions, with a global reach, with branches in Australia, the U.K., the U.S. and Asia.

FY22 was an exceptional year for the Corporate and Institutional Banking division. Thus, the business segment saw a 34.9% year-on-year improvement in its earnings, supported by strong revenue from solid volume growth and higher margins.

NAB’s third largest division is the Personal Banking business accounting for about 21% of the Group’s earnings. This division comprises consumer banking, the UBank business and the wealth division, asset management, superannuation, and mortgage brokerage advice.

The Personal Banking business slightly underperformed during the financial year. The division saw its earnings decline by -3.6% due to fierce competition in the home lending sector, leading to lower realised margins. The revenue dropped with lower margins despite the volume growth over FY22. Despite NAB’s efforts to lower operating costs, these impacts were only partially offset.

Source: NAB, shares in value

NAB’s New Zealand Banking, which accounts for 17% of the Group’s earnings, experienced a solid 14.1 growth year-on-year. This was mainly contributed by the revenue increase thanks to volume growth and higher margins. A robust and steady performance, given the revenue being partly offset by higher credit impairment charges and higher operating expenses due to the cost of support of investment growth and further compliance and controls system implementation.

Company Updates

NAB reported its FY22 full-year results: Net Interest Margin marginally down 6 points. Solid cash earnings growth +8.3% to $7.1 billion

The Bank has just released its full-year results on November 9. Given the tough trading condition over the financial year, we have been pleased with the Group’s performance during the period. NAB has delivered solid earnings growth throughout FY22. However, the market initially expected better results. This explained NAB share prices opened the day lower following the announcement. After the market digested the information, NAB shares recovered 1.70% by the end of the day.

FY22 in a nutshell:

  • Cash earnings increase of 8.3% year-on-year to $7.1 billion
  • Statutory net profit is up 8.3% as well to $6.89 billion
  • CET1 ratio maintained at 11.51%
  • Net interest margin (NIM) of 1.65%

NAB outperformed its pre-COVID revenue of $18.51 billion for the first time with $18.76 billion during FY22

FY22 was a tough period, full of uncertainties. Despite these challenges, we can say that NAB has been doing quite well in maintaining its earnings growth over the last two years. The Bank reported rising cash earnings, up 8.3% year-on-year to $7.1 billion. It is worth noting that earnings growth was driven by stronger revenue, which the Group reported $18.76 billion for the twelve months that ended on September 30. This marks the first time NAB has achieved revenue above its pre-COVID level in FY19.

The earnings growth was primarily driven by the Bank’s strong performance in its Business and Private Banking business, which saw a 21.5% increase in cash earnings to more than $3 billion. This was possible as the Bank achieved solid volume growth and higher margins whilst benefitting from lower credit impairment charges. The recent acquisition of LanterPay and investment in new technologies contributed to higher operating expenses which comprised additional bankers and resources to support the Company’s growth. However, these only partially offset the Business and Private Banking’s strong earnings performance.

The Corporate and Institutional Banking business did very well during the fiscal year. Thus, the business division saw its cash earnings surge by 34.9% year-on-year to more than $1.62 billion. This was possible as the Bank realised solid volume growth and higher margins whilst maintaining lower credit impairment charges.

NAB also did well in New Zealand throughout FY22 as its Banking Business delivered a 14.1% increase in cash earnings. This was also contributed by strong volumes and solid margins. However, NAB’s Personal Banking reported disappointing results. The Personal Banking division saw its cash earnings drop 3.6% to $1.59 billion as the Bank faced tremendous competition in home lending with margin compression.

NAB’s steady dividend growth continues in line with its earnings growth

Given the solid cash earning growth of 8.3% to $7.1 billion, NAB has decided to declare a fully franked final dividend of 78 cents per share. This brought the Company’s full-year dividend to $1.51 per share, a lucrative 18.9% lift year-on-year. Over the last two years, NAB has been consistent in offering solid dividend streams and actually, its dividend increased at a CAGR of 15.47% from FY20 to FY22. The NAB shares are due to go to ex-dividend on Tuesday, November 15, and the payment date is set on December 14. We like the Bank because it continues to provide a decent annual yield superior to 4%, representing a payout ratio of ~68%.

Investment Thesis

These are the three reasons why we think NAB is still a compelling stock to have in your portfolio:

1. Well-executed growth strategy benefitting from rising interest rate environment

NAB has been doing well throughout FY22 with the accommodative rising interest rate environment and throughout the prior eleven years of interest rate reductions. This proves the resilience of the business in the long run and its ability to generate profit in different economic cycles. During the fiscal year 2022, we witnessed improved cash earnings, achieved by the Company’s solid execution of its growth strategy, which consists of the following:

  • Targeting volume growth
  • A disciplined approach to limit costs
  • And expansion through strategic investments.

Overall, we have found NAB to be a well-diversified financial institution in which all its business segments contributed to underlying profit growth of 11.5% during the period. We also like NAB’s robust loan book growth, which grew by more than 13%. As we know, competition is fierce in the sector, which weighed slightly on NAB’s net interest margins down to 1.67%. But we are not too much worried about that. Thus, the Company has demonstrated its ability to maintain its net interest margins at an optimum level over the past few years. We even saw improvements during the second half of the financial year, from the 1HFY22’s 1.63% to 1.67% in 2HFY22.

Even though NAB has faced net interest margin compression due to recently increased competition in its sector, we believe the Company has the ability to mitigate its operating expenses and maintain adequate net profit margins going forward. Over the last three years, since FY19, NAB has realised exceptional net profit growth at a CAGR of 12.88%. We conservatively think that the Bank will be able to continue delivering such results over the upcoming years.

2. Solid balance sheet supporting sustainable growth whilst remaining conservative

We like NAB’s approach to structuring its balance sheet adequately to support sustainable long-term growth while keeping the Bank safe. The Group maintained its capital above its targets, even after completing its $3.9 billion of “on-market” share buybacks over the fiscal year. NAB is on the safe side, as the Bank ensures its collective provision coverage remains well above its pre-pandemic levels. In our opinion, the Bank is doing the right thing, as keeping these settings is crucial during the current economic uncertainty, with higher interest rates and inflationary pressure likely to challenge some of its customers.

On a positive note, we are confident in the resilience of NAB’s customer base and the broader economy. Thus, despite a gloomy near-term outlook, we have also seen strong employment. Moreover, the Bank has reported significant household and business savings.

So far, we have seen NAB’s long-term strategy to be highly relevant. Hence, the Bank has been doing quite well across the different market cycles in various operating environments and economic conditions. NAB’s strategy has worked very well over the past two years. Thus, the numbers speak for themselves, and we have witnessed the Company returning to earnings and dividend growth since FY20.


Source: NAB

NAB has consistently maintained its strong financial position as the Bank fulfils its minimum capital requirement with a healthy Common Equity Tier 1 ratio (CET1) well above 10% and a reported CET1 of 11.51% for FY22. This was within the Company’s management target range of 10.75% and 11.75%.

Furthermore, the Bank’s asset quality is robust, with the ratio of 90+ days past due and gross impaired assets to gross loans and acceptances reduced by 28 basis points to 0.66%.

3. NAB is highly capable of driving cost reduction to remain competitive

One of the key aspects for the Bank to outperform its peers is cost savings. So far, NAB has shown a strong capability to keep its costs under control and maintain its net interest margins adequately positioned throughout various interest rate cycles.

For FY23, NAB did not provide any earnings guidance. However, we are confident that the Bank will likely realise earnings per share growth onwards FY23, mainly driven by cost reductions and net interest margin tailwinds induced by interest rate hikes. On top of that, we also believe that business and institutional demand for credit could overtake mortgages allowing NAB to be better positioned vis-à-vis the other banks.

Recommendation

NAB has been performing optimally through eleven years of interest rate reductions, maintaining adequate net interest margins. During FY22, NAB has also been able to keep on its solid earnings growth trajectory, and we expect the company to benefit further from a rising interest rate environment. The Company has been exemplary, delivering solid operating capabilities such as keeping costs under control, which is critical to remain competitive. We expect another year of steady returns. We are reiterating a long-term “Buy”.

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