National Australia Bank
About the author:
- Author name:
- By Azib Khan
- Job title:
- Former Senior Analyst
- Date posted:
- 07 February 2017, 10:31 AM
- Sectors Covered:
Unaudited cash earnings for the quarter of ~$1.6bn were slightly softer than we expected due to soft revenue outcome and expense run-rate being higher than expected. Redundancy costs were elevated in the quarter. However, tighter cost management should allow National Australia Bank (NAB) to achieve modestly positive jaws in FY17.
Revenue outcome soft with revenue run-rate up ~1%
Net Interest Margin (NIM) was broadly stable from 2H16 to 1Q17 at both the headline level and after excluding the impacts of markets and treasury. We believe that NAB continued to run off low-returning institutional exposures over 1Q17 and this would have weighed down on group loan growth. It would also explain why NAB's Australian loan growth over 1Q17 was well below system loan growth, despite NAB's home loan growth only being slightly below system home loan growth according to APRA statistics. Run off of low-returning institutional exposures may also be resulting in non-interest income softness in the institutional division.
Redundancy costs will probably need to fall
While the revenue run-rate growth was ~1% from 2H16 to 1Q17, expense run-rate growth was ~5% over the same period. Despite this, NAB is continuing to target positive jaws for FY17. While this target might look to be a stretch at face value, it should be noted that 1Q17 had elevated redundancy costs. We believe tight management of discretionary expenditure, including project spend to some extent, can result in marginally positive jaws being achieved and we are forecasting this to be the case.
Increase in corporate impaireds driven by handful of exposures
The credit impairment charge came in lower than expected for the quarter at $164m. On a run-rate basis this charge is very similar to the charge in 2H16 after excluding the $100m overlay that was taken for mining and agriculture exposures in 2H16. However, there was a ~$200m increase in impaireds in the 'Corporate (including SME)' category in the Pillar 3 Report over 1Q17, which was driven by a handful of single-name exposures. We provide more detail on this in our Research Note (clients only).
Risk of dividend cut remains
While our base case is that NAB will keep its nominal dividend flat from FY16 to FY17, we believe there is a risk of a cut this year. We view NAB as currently having the most stretched dividend payout ratio relative to return on tangible equity (RoTE) of all the major banks. Over time, NAB is aiming to reduce its dividend payout ratio to within its long-term range of 70-75%.
We have reduced our cash EPS forecast by 0.2% in FY17, 0.6% in FY18 and 0.6% in FY19. These reductions are largely due to lower income forecasts. We retain our Hold recommendation and make no change to our share price target.
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