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NAB cuts dividend more than expected, but a good long-term decision: Morningstar view

David Ellis, CPA  |  03 May 2019Text size  Decrease  Increase  |  
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National Australia Bank’s (ASX: NAB) first half fiscal 2019 cash earnings of $3 billion mildly disappointed, falling 5 per cent below our forecast.

The interim dividend was cut more than expected to 83 cents per share. The 16 per cent cut in dividend to a more sustainable payout is a good long-term initiative, providing greater flexibility to deal with potential future earnings volatility, regulatory changes and unexpected increases in customer remediation costs.

Despite the profit miss, the bank is coping reasonably well with a wide range of challenges, including the departure of the chief executive and announced retirement of the chairman. Business volume growth is good and bad debts remain around historical lows despite increasing modestly.

The process of restoring trust and building a culture of putting the customer first has started, but it is a long-term journey. Rebuilding culture, accountability and governance takes time. 

No changes to our $30 fair value estimate and at current prices, the stock is undervalued trading 15 per cent below our valuation.

The transformation project is on track and we expect a new chief executive to be appointed before December. The proposed sell-off/demerger of the MLC wealth business in 2020 will be an early test for the new Chairman, refreshed board of directors and new chief executive.

We expect a period of stability under acting chief executive Phil Chronican, who has broad-based experience across the Australian banking sector.

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The interim cash profit from continuing operations includes an announced $325 million of customer remediation charges. Excluding the provision, the adjusted cash profit is a more respectable $3.3 billion.

Our fiscal 2019 cash earnings forecast of $6.2 billion is broadly unchanged, but we adjust for higher bad debts, lower net interest margins, and lower operating expenses.

Our total dividend forecast is reduced to $1.66 per share from $1.80 previously. We expected a 9 per cent cut to the interim dividend and were surprised with the 16 per cent reduction.

is a senior equity analyst in the equity research team at Morningstar.

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