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NAB's cash profit meets forecasts, dividend steady

Nicholas Grove  |  27 Oct 2016Text size  Decrease  Increase  |  

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NAB delivers a cash profit and dividend in line with expectations, moving into 2017 as a "reshaped" bank following its exit from CYBG and the sale of its life insurance stake to Nippon Life.


National Australia Bank's (ASX: NAB) fiscal 2016 cash profit--a preferred measure of underlying performance among the big four Australian banks which strips out one-off items--rose 4.2 per cent to $6.48 billion.

The result was broadly in line with both Morningstar and consensus forecasts.

Statutory net profit fell 94.4 per cent to $352 million, reflecting a loss on the sale of CYBG and 80 per cent of NAB Wealth's life insurance business to Nippon Life.

Return on equity from continuing businesses, on a cash earnings basis, fell 50 basis points on the prior year to 14.3 per cent, mainly due to the effects of a $5.5-billion capital raising that occurred in the September 2015 half year.

NAB declared a final dividend of 99 cents a share fully franked, unchanged on the 2016 interim and 2015 final dividend, and bringing the full-year dividend to 198 cents a share.

The final dividend will be paid on 13 December 2016 to shareholders on record as of 7 November 2016, NAB said in a statement to the ASX.

Group net interest margin declined 2 basis points over the year, which NAB attributed to higher funding costs.

On a cash earnings basis, revenue for the year rose 2.5 per cent, while expenses rose 2.2 per cent due to higher personnel costs, and increased technology-related amortisation and project spend, the bank said.

The charge for bad debts rose 7.0 per cent to $800 million, due primarily to the impairment of a small number of large single-name exposures in the Australian Banking business, NAB said.

NAB said its balance sheet remains strong, with its Common Equity Tier 1 capital buffer ratio of 9.8 per cent well above the bank's target range of 8.75-9.25 per cent.

Following the exit from CYBG and the sale of its life insurance business stake, NAB CEO Andrew Thorburn said the bank is moving into 2017 as a "reshaped" business--"stronger, simpler and focused on helping our customers in Australia and New Zealand".

"These changes have been achieved while delivering an improved operating performance and maintaining a strong balance sheet, sound asset quality and tight control of costs," Thorburn said.

"This is against a backdrop of favourable Australian and New Zealand economic conditions, but also rising funding costs and global uncertainty.

"Improving momentum and stabilising margins in Business Banking have been particularly pleasing, with lending and revenue growth focused on higher-returning priority segments.

"In Personal Banking, we made good progress in restoring home loan volume growth back to system levels after a period of significant change in pricing and credit policies."

By division, Australian Banking cash earnings rose 7 per cent to $5,472 million, reflecting higher revenue and lower bad debt charges.

New Zealand Banking's cash earnings rose 2 per cent over the year to NZ$836 million on the back of improved revenue and lower bad debt charges reflecting favourable economic conditions outside the dairy sector, NAB said.

NAB Wealth's cash earnings rose 13 per cent to $356 million, reflecting stronger revenue and lower expenses.

Standouts and key risks

Morningstar head of Australian banking research, David Ellis, said the "standouts" from the result were NAB's relatively high return on equity, strong capital position and low loan loss rate, and that these metrics "bode well for future earnings growth".

"Key risks going forward include margin pressure, tight management of expense growth, loan quality as the loan loss ratio is the best (lowest) of peers, organic capital generation, risk-weighted asset growth and dividend sustainability," he said.

Ellis said while a key highlight of the result was the 99-cent final dividend, he believes the 80.8 per cent payout ratio is unsustainable and he therefore expects the fiscal 2017 dividend to be cut to $1.90 per share.

"We maintain our position the payout should be cut over time to more sustainable levels within the long-term target range of 70-75 per cent," Ellis said.

Ellis also believes NAB is now in the "best strategic position" it has been in for at least a decade to leverage its core business banking and retail franchises in Australia and New Zealand.

"Management's focus on the successful, lower-risk, and profitable domestic banking businesses provides confidence in the earnings outlook," he said.

"Growing economies of scale, steady market positions, pricing power, a strong balance sheet, and high credit ratings provide a robust platform to drive growth.

"As Australia's biggest business bank, NAB has the most to gain from the rebound in demand for business credit."

While not providing any specific earnings guidance, Thorburn said NAB is well positioned to deliver "improved customer outcomes and attractive returns for shareholders" in the year ahead.

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Nicholas Grove is a Morningstar journalist.

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