NAB result pushes 'all the right buttons'

National Australia Bank reported a flat cash profit of $3.29 billion for the first half which contained very few surprises and was broadly in line with expectations.

A clean, flat NAB result - albeit one boosted by stronger trading income - was the general view. Bell Potter's banking analyst TS Lim described the numbers as "good" and "pushing all the right buttons”.

“Preliminary observations – they delivered!” he said in a dealer note, adding that net interest margin is unchanged from the previous half at 1.82 per cent. So," a sigh of relief” especially given more “upside to come in the second half from rate rises”.  

Revenue was up 1.7 per cent to $8.86 billion although, as UBS analyst Jon Mott pointed out, by excluding the benefit from stronger markets and treasury, revenue growth was just 0.4 per cent on the immediately preceding half.

As expected bad debt charges were very low at $394 million, down 7.3 per cent on the half with plenty of overlay intact and for potential risks relating to commercial real estate. The 90 days past due rose 5 basis points to 41 basis points driven mostly by increased mortgage delinquencies in Victoria and New South Wales albeit off a low base.

“This is the first time we have seen an uptick in New South Wales and Victoria mortgage arrears,” noted Mott.
 

'Hard to hold'

NAB is on track to achieving positive ‘jaws’ over the full year as a number of cost cutting initiatives gain further traction during the 2017 second half.  

While expenses rose to $3.78 billion - due to higher personnel costs including redundancy charges, and increased technology depreciation and amortisation charges - these were partly offset by $102 million productivity savings against an annual target of $200 million.

By looking at the previous corresponding half - rather than the immediately preceding half - NAB did, in fact, deliver positive 'jaws', with expenses rising 0.8 per cent.

However, not everyone was thrilled with the result from the country’s largest business banker. Citi’s take is that the bank hit earnings estimates because the market’s expectations were probably too low. And, the profit performance is not good enough to keep the stock running.

“The stock price has rallied hard, up 8 per cent year to date and 21 per cent in the past 12 months and these gains will be hard to hold onto in our view," Citi analysts argued.

“The extent of share price strength belies challenging operating conditions for the industry, albeit NAB is no longer a serial disappointer."
 

Andrew Thorburn

"This is another solid result and reflects improving momentum as we execute on our strategy,” said NAB chief executive Andrew Thorburn.

“Revenue is up, our asset quality remains sound and we have further strengthened our funding and capital positions. Cost growth has moderated from 2017 first quarter levels as our productivity initiatives gain traction. Our Return on Equity of 14 per cent reflects our disciplined approach to capital allocation.

“There have been solid contributions across the business, in particular our priority segments of small and medium business, where we have maintained or grown our leading market shares. Disciplines in place to reshape our business, including use of automation and meeting more of our customers’ needs digitally, are delivering efficiency benefits.”

The favourable credit environment, modest balance sheet growth and a 3.6 per cent fall in risk-weighted assets delivered a capital lift with the bank’s common equity tier one capital ratio climbing 34 basis points to a strong 10.11 per cent.

Low RWA growth is a highlight as NAB focuses on running down undrawn facilities. The strongest earnings growth came from the corporate and institutional bank with cash earnings up 18 per cent. In the consumer bank earnings were stable.

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