National Australia Bank: 3Q21 trading update

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Former Senior Analyst
Date posted:
12 August 2021, 12:00 PM
Sectors Covered:

  • National Australia Bank (ASX:NAB) has announced 3Q21 unaudited cash earnings of $1.70bn.
  • We have reduced our FY21F cash EPS by 3% due to a softer-than-expected Markets & Treasury (M&T) outcome in 3Q21 and because we are conservatively assuming no further provision release in 4Q21.
  • Retain Hold recommendation.

Revenue growth pleasing after excluding M&T

3Q21 revenue declined 1% from 1H21 on a run-rate basis with higher volumes and margins more than offset by lower M&T income. Excluding M&T, revenue increased 1.9%.

National Australia Bank (ASX:NAB) has said that the net interest margin (NIM) was broadly stable from 1H21 to 3Q21. Excluding M&T and higher liquids, NIM increased modestly with lower deposit and funding costs partly offset by the impact of low interest rates combined with home lending competition and mix. The 3Q21 NIM outcome is a touch better than our expectation.

NAB’s Australian home lending grew 2% from Mar-21 to Jun-21 and SME lending grew 4.3%, both outpacing system.

Cost growth guidance reiterated

Expenses declined 1% on a run-rate basis from 1H21 to 3Q21, with higher technology and investment spend offset by productivity benefits.

NAB has reiterated its FY21 cost growth target of 0-2%.

Net provision release in 3Q21

There was a credit impairment benefit of $112m in 3Q21, with the collective provision (CP) coverage of credit risk weighted assets declining 13bps over the quarter to be 137bps as at 30 June 2021.

NAB has said that the key driver of this CP reduction has been the sale of ~$1.5bn worth of aviation loans and associated CP reduction of ~$300m in May.

The ratio of 90+ days past due and gross impaired assets to gross loans and acceptances decreased 10bps to 1.13%.

While NAB’s CP coverage of 137bps remains ~40% higher than NAB’s prepandemic coverage level and we see potential for further provision release, we are conservatively assuming no further provision release over our forecast period. Our forecasts assume that the CP coverage of 137bps will remain broadly unchanged over our forecast period, resulting in a cost of risk of ~4bps pa.

Potential for further capital management

NAB recently announced the commencement of a $2.5bn on-market share buyback program as detailed in our report titled Another confidence booster jab amidst lockdowns.

NAB also recently announced it has agreed to acquire Citigroup’s Australian consumer banking business as detailed in our report titled Acquisition marginally beneficial in wider context.

After allowing for the above two points, we are forecasting NAB to have surplus CET1 capital (above a CET1 ratio of 11.0%) of $5bn at end-FY22F.

While we consequently see potential for further capital management, we will not be surprised if NAB waits for its AUSTRAC issue to be resolved before embarking on further capital management.

Investment view and changes to forecasts

We have reduced our FY21F cash EPS by 3.3% due to lower M&T income and our conservative assumption of no further provision release.

We have not materially changed our cash EPS forecasts for outer years.

Our target price, based on our DDM valuation, is unchanged at (login to view).

We retain a Hold recommendation

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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