National Australia Bank (NAB) Update

Submitted by Jim Thesiger on 12 May, 2008 - 14:53

National Australia Bank (NAB) has a $34.50 share price target from Australian stock analyst Macquarie Research Equities.

National Australia Bank (NAB) Great costs, soft revenues and weak BDD

1H08 Cash NPAT down 10% seq. Strong div. Up 10c on pcp:

Revenues +2.2%. Costs down 3.3% (best of peers). Margins -8bp (-16bp normalised). IEAg was 11% (5% ex conduits and liquidity). NOIg was -7% (+3% normalised for hedging). Little provided in the way of outlook guidance. Our forecasts remain broadly intact. We forecast EPSg +1% (08E) and 11% (09E). Capital: NAB T1 appears thin at 6.5%. Not surprising that the div was fully underwritten with a 2.5% discount.

BDD: 1H08 charge $940m, up 135%, now 48bp:

BDD and NPL outcomes were weak. Hefty 135% increase driven two thirds by specifics (conduits $181m, API $80m) with one third due to pre-emptive collective increases. NPLs were up 24%, now at 72bp compared to peer average of 54bp (and even ANZ at 63bp). BS cover is fine, post the special $214m provision.

Divisionals: Australia and UK strong. Outlook less clear:

Through some mathematical quirk, all divisions outgrew the Group. Corporate center NPAT losses blew out by $124m. Australia: strong result, up 5%, driven by another flat cost line. Europe: strong result, up 11%. Revs up 2.7%, costs down, BDD flat, but NPLs doubled. Not a good outlook. Inst: flat. Strong core line driven by trading, more than offset by weak BDD line.

Maintain Neutral. PT $34.50. Least preferred

Positives: (1) cheap; (2) strong Australian business growing well; (3) commitment on cost outcomes to continue. Key risks: (1) UK system: £1 trillion of market cap at a PE of 6x is telling us something; (2) M&A risk: NAB recently acquired Great Western in the US at 19x; (3) high NPLs. NAB appears riskier than peers. Our PT is based on DCF, SOTP, international peers.