Can a de-risked NAB shrug off its underdog persona..?
While it must have been music to shareholders ears to learn recently that National Australia Bank (ASX: NAB) was finally getting rid of its troublesome UK asset Clydesdale Bank (ASX: CYB), the half year result to 31 March 2016 also delivered some equally encouraging numbers, including a decision to boost the share of profits paid out to shareholders to 79% – outside its 70 to 75% range – and a provision for bad loans that fell 6%.
Its bad debt charge of 0.14% of assets is also lower than 0.17% for Commonwealth Bank, 0.21% for Westpac, and 0.32% for ANZ Bank.
Compared to the results of Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) a week earlier, NAB's underlying cash profits, up 6.5% to $3.3 billion, were also very encouraging.
But NAB reported a 4.5% fall in revenue to $8.96 billion and once the spinoff of its UK business Clydesdale Bank was taken into account, it made a net loss of A$1.74 billion, down 150%.
While the bank's cash return on equity (ROE) came in at 14.1%, slightly down from 15.8% in the prior period, its Australian banking division performed strongly with a 5% rise in cash earnings over the prior corresponding period.
Helped by lending growth and wider net interest margins – the spread between interest the bank earns on loans and its cost of funds – rose for the first time since 2011, to 1.93 percent from 1.88 percent in September. Cash profits in Australia rose 5% to $2.9 billion, while weaker conditions in NZ, due to a jump in bad debt charges related to the dairy sector, saw profits fall 3% to $NZ404 million ($373 million).
Meantime, profits in NAB's wealth division rose 12% to $249 million and during the second half of this year it is expected to offload 80% of its life insurance to Japan's Nippon Life.
To its credit, NAB has exited most of its overseas businesses in the US and the UK in the past year and sold most of its underperforming life-insurance units to focus on Australia and NZ.
With the UK millstone, Clydesdale Bank finally off its back, NAB is moving closer to pulling off the restructuring story for what is fundamentally a fully valued mature business. The de-risking of the business, since the sell-down of its overseas assets should also go some way to removing the underdog moniker that's shrouded the business for years.
Being able to finally deliver a set of numbers that focuses solely on the Australian and NZ banking operations is a major step forward for NAB.
However, with a possible increase in corporate defaults and mortgage delinquencies, particularly in the mining states of Queensland and Western Australia, and ongoing margin pressure emanating from lending competition and increased funding cost – it's shaping up to be the next challenge facing the bank.
Given the business earnings headwinds confronting NAB, it's hardly surprising that it trades on an underwhelming price to earnings (P/E) multiple of 11x, and an 8% discount to its intrinsic value (IV).
While the share price jumped over 2% following the interim result, it remains around 25% down on its most recent high of 23 March 2015 high of $38.63. But with the stock now trading close to a mid-level target price of $29.10, it does look to be fully valued without any major announcements.
Like Westpac it's also unlikely that NAB will be able to sustain such high dividend rates for long, with earnings per share (EPS) forecast to drop from $2.56 last year to $2.47 by 2018. Similarly, dividend per share (DPS) is also forecast to drop from $1.98 last year to $1.92 in 2018.