A less Uncertain Future for Australian Banks, particularly on the Downside

Business Strategy & Outlook:

National Australia Bank is one of four major banks operating in oligopolistic Australia and New Zealand markets. It is Australia’s biggest business bank, offering a full range of banking and financial services to the consumer, small business, and corporate sectors, with significant operations in New Zealand. The bank has consistently held onto its large share of business loans, and continued investment shows a clear intention to retain this position. The banks greater investment into specialist credit teams across areas such as agriculture, health, education, franchising, as well as business banking centres, sets the bank apart. This ultimately led to a better understanding of the customers’ requirements, faster turnaround times, and higher approval rates. Capacity to make investments into digital onboarding and fast access to unsecured lending ensure the bank retains high satisfaction amongst small business customers. While risks directly related to COVID-19 have abated, wage pressures, labour, and supply chain challenges, and high inflation pose challenges as the cash rate increases. The main current influences on earnings growth are modest credit growth and widening margins as the banks reprice lending rates in a rising cash rate environment. Operating expenses will continue to rise as the bank invests to capture growth opportunities, this despite productivity improvements being realised. After enjoying super low impairment charges pre-2020, large loan losses expected due to COVID-19 resulted in large provisions in fiscal 2020. It is expected a return to midcycle levels around 0.18% in fiscal 2025. The MLC wealth divestment completed in May 2021 after reaching an agreement with IOOF for AUD 1.44 billion as the bank simplifies and refocuses on its core banking operations.

Financial Strengths:

National Australia Bank is in good financial health, with common equity Tier 1 of 12.5% above the regulator’s 10.5% benchmark as at March 31, 2022. The bank slashed the fiscal 2020 dividend to AUD 60 cents per share on both lower earnings a reduced dividend payout ratio. The payout shall average 70% of earnings before notable items over the next five years, in line with the target range of 65%-75% introduced in 2020. National Australia Bank completed a AUD 2.5 billion buyback announced in July 2021, announcing an additional AUD 2.5 billion buyback in March 2022. Assuming completion of the second share buyback and the acquisition of Citigroup’s Australian consumer business, the bank should remain above its 10.75% to 11.25% target range.

Bulls Say:

Management focus is on the successful, lower-risk, and profitable domestic banking. Economies of scale, pricing power, a strong balance sheet, and high credit ratings provide a robust platform to drive growth.
As Australia’s biggest business bank, National Australia Bank has the most to gain from the rebound in demand for business credit.
NAB has the ability to achieve significant cost savings and drive operational efficiency improvements.

Company Description:

National Australia Bank is the most business-focused of the four major banks, holding the largest share of business loans and the number-three spot in home loans. National Australia Bank is currently the third-largest bank by market capitalisation, with the franchise covering consumer, small business, corporate, and institutional sectors. Under the UBank brand the bank also owns one of Australia’s largest digital-only banks. Offshore operations in New Zealand round out the group.

(Source: Morningstar)

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