National Australia Bank: Dividend outlook increasingly robust

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Senior Analyst
Date posted:
06 May 2021, 3:30 PM
Sectors Covered:
Banks

  • National Australia Bank (ASX:NAB) has announced 1H21 cash NPAT (from continuing operations) of $3,343m, 10% less than our expectation but ~6% better than Factset consensus. The miss against our numbers is largely the result of a lower credit impairment benefit and softer Markets & Treasury income than we expected. An interim dividend of 60cps fully franked has been declared.
  • With the asset quality outlook improving, credit loss provisioning looking conservative, and an excess CET1 capital position, the outlook for ordinary dividends is increasingly robust. Additionally, we see increasing potential for capital management over our forecast period. These points are not just true for NAB, but for the major banks sector as a whole. NAB has said that future ordinary dividends will be guided by a payout ratio range of 65-75% of cash earnings.

Provisioning still looking conservative despite net release

The 1H21 credit impairment benefit of $128m is less than our forecast of $517m. NAB’s collective provision (CP) coverage of credit risk weighted assets (CRWA) was 155bps at Dec-2020 and we were expecting this to be reduced to 140bps at Mar-2020.

However, NAB has only reduced this coverage to 150bps at Mar-2020, which we believe to be a very conservative coverage ratio given the improvement in the economic outlook. While there was an ‘underlying’ net provision release of $114m and a release of Economic Adjustment (EA) of $235m, NAB topped up its forward-looking adjustments (FLAs) by $221m primarily for aviation and high-risk mortgage exposures.

We now forecast NAB’s CP coverage to be reduced to 140bps in 2H21F.

Revenue stable excluding Markets & Treasury

1H21 Markets & Treasury income was soft at $808m. While this revenue stream is inherently volatile, the 1H21 outcome compares with NAB’s five-year (FY16-FY20) halfyearly average Markets & Treasury income of $909m.

The softness in 1H21 appears to be driven by lower income from interest rate and foreign exchange risk management. Excluding Markets & Treasury, revenue was stable from 2H20 to 1H21 despite no growth in the Australian mortgage book.

Increasing potential for capital management

NAB’s CET1 ratio of 12.4% as at 31/3/2020 is better than our expectation of 12.0%. This ratio compares with APRA’s ‘unquestionably strong’ benchmark of 10.5%. NAB has today said that Its CET1 ratio will be managed towards a target range of 10.75-11.25%.

NAB has also today said that it will have a “bias to reducing share count to drive sustainable ROE benefits”. Putting these points together suggests to us that NAB will be looking to conduct capital management in the form of share buybacks.

We are forecasting surplus CET1 capital (above 11.0%) of $9.1bn at end-FY22F, equating to $2.75 per share.

Investment view and changes to forecasts

We have reduced our cash EPS forecasts by 3.5%/3.1%/0.8% for FY21F/FY22F/FY23F respectively largely due to lower non-interest income forecasts. We retain an Add recommendation. Our target price, based on our DDM valuation, is unchanged (login to view).

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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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