National Australia Bank Limited (NAB)
HOLD

Margin focus

 4 May 2023
Sector: Financials

1H23 RESULT

Need To Know

  • Earnings inline, dividend below market 
  • Margin weakness the focus 1.77% vs 1.80% market
  • Exit margin implies 4-5% downgrades for FY23E/24E market earnings estimates 

Record 1H earnings result, no notable items, weak margins will be the focus for the market. 

Rev $10.5bn vs $10.8bn market

Underlying Profit $6.1bn vs $6.2bn market

BDD: $0.4bn vs $1.1bn market

Cash Earnings: $4.1bn vs $4.0bn market 

EPS $1.24 vs $1.22 market

DPS $0.83 vs $0.86 market.  No renewal of share buyback.  

Net Interest Margin (NIM) 1.77% vs market 1.80%.  2Q23 exit margin 1.76% vs market at 1.80% for FY23E/FY24E. 

CET1 12.2% vs 11.5% pcp, NAB target range 11-11.50%

Outlook comments – highly competitive, improving cost to income, but margins comments will weigh 

A less positive impact from higher RBA cash interest rates in 2Q vs prior periods – this will continue going forward. Competition in deposit pricing (notable in Feb/Mar 23), and home lending remains strong in both new and existing loans. FY23 cost-to-income ratio expected to be below FY22 levels – the market currently has a 1%-point improvement in FY23 to 51%.

Investment View

NAB has delivered a clean, record earnings result. But it’s the outlook on margins that will worry the market, with the exit NIM run rate implying 4-5% downgrades to both FY23E/24E estimates. 

Elevated competition and less benefit from higher RBA cash rates suggest a NIM of around 1.65-1.75% vs market at 1.80% in both FY23E and FY24E. The market is likely to fear the worst here given the home lending competition stepped further in the 2Q23 and back-book repricing pressures have stepped up. Around 1/3 of the mortgage back-book has been repriced. 

So where to now, with the NAB share price down -7% intra-day, reflecting weak US banks share prices overnight, and the prospects of potential earnings downgrades?

NAB does not look stretched on a valuation basis. 12x NTM PER, 1 standard deviation below the long-term average and PER rel 0.80x vs market, which is in line with the long-term average. The forward dividend yield is now approaching 6%. The prospects for the resumption of a buyback is not out of the question over the next 6 months. Retain Hold Rating.

Figure 1: NAB NIM performance. Exit 1.76% compares to 1.80% for FY23.

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Stock Overview

Share Price

Company Overview

NAB provides banking services including accounts, loans, insurance, investments, payments, and online banking to individuals and businesses globally. It also offers services for small businesses and industry-specific banking.

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