The current recovery in Australian business as the country comes out of lockdown bodes well for the National Australia Bank, although interest margins could tighten further
– Further compression of net interest margins still likely in FY22
– NAB re-commits to a CET1 target range of 10.75-11.25%
– AUSTRAC investigation underway, which contributes to uncertainty
By Eva Brocklehurst
Improved operating performance and balance sheet momentum have distinguished National Australia Bank Ltd (ASX:) over the recent banking season. The main weakness was market income, although comparable companies were similarly affected.
Credit Suisse (SIX:) believes the bank's "simple" strategy is working well, placing it well positioned for a recovery in the economy, while Jarden believes the current environment is most favorable for corporate credit – the strength of the bank – since the GFC.
Jarden is positive about the upside in corporate credit growth, as corporate investment intentions are the highest in more than a decade. The broker is also encouraged about the skewing of capital spending towards growth.
Business confidence has recovered to pre-pandemic levels, boosted by low rates, readily available credit and government incentives.
FY21 cash income of $6.56 billion was supported by a bad debt write-back. The final dividend of $0.67 reflected a payout ratio of 68%, while the second half CET1 capital ratio was a healthy 13%.
Citi believes the bank has identified the best core revenue outlook across the industry. Interest margins appear more resilient compared to peers, while mortgage and corporate loan portfolios are dynamic.
In addition, the costs remain manageable. The broker compares this to peers who have not been able to simultaneously achieve success across the revenue and cost lines.
As NAB is the largest in corporate banking, Goldman Sachs (NYSE:) suggests it will benefit more from the ongoing economic recovery. The weakest point was market and treasury revenue, which brokers said were well below typical run rates in the second half.
The bank has indicated that volatility has increased lately, so opportunities should arise in that segment. Market earnings were weak, but no worse than peers, Ord Minnett says, and expects greater volatility to mean improvement ahead.
Margins
The main problem, Jarden argues, is how much further net interest margins can fall. The impediment to lower borrowing margins was offset by lower borrowing costs and deposit rates, but further compression is expected amid competition and low interest rates.
Net interest margins were flat at the end of FY21, excluding the impact of markets and treasury bills, and are likely to remain so, the bank emphasizes, in the low interest rate environment ahead for FY22. Competitive pressures are expected to continue to affect home loan margins.
Yet Morgan Stanley (NYSE:) is now more confident that loans can be expanded at a better pace to reflect the better environment, and is forecasting 5.5% and 6% growth, respectively, in Australian residential and non-residential loans.
The broker estimates a margin decline in the fourth quarter of FY21 of up to -10 basis points, largely due to higher cash and lower Treasury bill income. The margin is expected to decline to 1.64% in FY22, while net interest income is up 3.5%.
Valuation
In the future demonstrable returns on equity are critical to drive share price states Citi, forecasting 8% earnings growth in FY22. Nevertheless, the broker believes that the stock is fully priced and already allows for stronger future growth.
"Business Recovery Augurs Well For NAB" was originally published on FNArena.com and republished with permission.
