National Australia Bank (NAB) Update

Submitted by Craig Strzelecki on 7 May, 2007 - 19:52

National Australia Bank (NAB) has a retained Outperform broker call from sharemarket analyst Macquarie Research Equities. This Thursday 10th May, NAB, the last of the big banks to report this season, will release its 1H07 results. The analyst expects NAB to announce a robust result, and reiterate that NAB is their no. 1 pick in the sector, following last week’s revisions. With MRE expecting NAB to announce an 86 cent dividend, NAB represents excellent yield plus growth potential. The analyst's forecast adjusted 'cash' earnings of $2,088m (excluding hedge ineffectiveness) and cash EPS
of 128.9 cents, representing 12.6% growth on pcp. An interim dividend of 86 cents is expected. Key Things to Look For: (1) Sequential growth in FY07 expected to be biased to the 1H. Despite the typical seasonality around the Australian banking profit growth being biased to the 2H and the risk of sequentially weaker nabCapital earnings in 1H07, the analysts still expect the group’s sequential profit growth to be a little stronger in 1H07 than 2H07. This reflects a combination of the 1H seasonal bias in UK earnings, our expectation that NAB's loan loss charge will be more stable relative to 2H06 than peers (reflecting more conservative provisioning in NZ in FY06 and 'housekeeping' in Australia in 2H06) and the impact of strong investment markets on investment income. (2) Business lending momentum to remain the key driver in Australia. Despite the slower and continuing competitive SME segment raising doubts around NAB's ability to sustain its superior positioning in this segment, MRE understand the business lending momentum in the Australian region overall has continued in 1H07 with margin pressure less than in previous periods. This of course will be critical given NAB's continuing weaker than peer Australian retail banking performance. (3) 1H07 UK result should be strong. Seasonality and ongoing profit ramp up in NAB’s IFS centres should underpin a very strong UK result this half. In local currency they forecast NAB’s ongoing UK operations to deliver sequential profit growth of 17% and YoY growth of 35%. (4) nabCapital – risk of sequentially lower earnings given lower provision releases and SF contribution. There is a risk that nabCapital’s sequential earnings will be weaker in 1H07 given the spike in lumpy structured financing income in 2H06 and expectations of reduced provision releases following completion of the asset shedding program. Of course, with peers having all reported solid increases in financial markets income, this could provide a positive (albeit lower quality) upside to the analyst's nabCapital forecast. Update on capital management: National Australia Bank (NAB) clearly has capacity to announce further capital management with our forecast that it will still have ~$1.9bn in surplus ACE at September 2007 after completion of the current buy-back program (a little under half of this remaining surplus having already been factored into our buy-back assumptions). The question is whether NAB announces further capital management this week or at the FY07 result. With NA'’s previous rate of buying back stock suggesting the current buy-back would not be completed until around mid-August, it is quite possible NAB will delay further announcements. Action and recommendation: The analyst's expect NAB's 1H07 result to confirm that the bank remains on track to deliver on their expectations. Accordingly, although the stock is trading close to the analyst's price target, they retain their outperform rating pending analysis of the result.

National Australia Bank Limited is listed on the Australian Stock Exchange (ASX) under stock code NAB. You can view their investor website here. John Stewart is the CEO of National Australia Bank and Michael Chaney the Chairman. The company offers Banking, financial and related services. NAB was listed on the ASX on 1 January, 1974. Find out the meaning of the recommendations in this primer. Browse for other stockbroker recommendations. You can use Instalment Warrants to trade NAB. Check your charts and good luck with your share trading!