From Credit Suisse:
Event: NAB reported (company defined) cash earnings of $3,150mn (up 9% on $2,903mn 1H13) which was in line with the $3,158mn Bloomberg consensus but 2% short of our $3,216mn estimate. Interim DPS of $0.99 (up 6% on $0.93 pcp) was in line with the Bloomberg consensus but $0.04 short of our estimate. Refer detailed financials attached. Relative to our estimates, costs were higher than expected (explainable by $229mn of UK redress charges taken above the line) as was effective tax, partially offset by lower-than-expected bad debts. Compositionally the result was softer than expected, with sizable margin compression offset by declining bad debts. Divisionally sequential cash earnings was driven by turnaround in UK CRE, UK Banking and Wealth, with a softer Australian Banking result (-1%).
- Investment Case: A disappointing result overall. What we liked about the result: 1) Equity Tier 1 ratio 8.64% (8.43% sequentially); 2) Declining bad debt charge 0.20% (0.33% sequentially) driven out of Australia (lower specific provisioning) and the UK (negligible UK CRE charge); 3) Impaireds ratio improving (particularly in Australia) What we didn’t like: 1) Poor Australian Banking division sequential underlying profit -4% (revenues -1%, costs +2%); 2) Group margin compression (-8bp sequentially) driven particularly by lending (Australian business, Australian & NZ mortgages), higher liquid holdings; 3) On-going Group cost to income deterioration.
- Valuation: NAB currently trades on 12.0x 12-month prospective earnings (11% discount to the major bank peer group vs. a 8% four-year average discount) and a corresponding book multiple of 1.8x.
