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NAB earnings watch: 3 things to consider ahead of the Q3 report

A dividend update, the all important CET1 ratio and the impact of the Royal Commission on the bank’s bottom-line will all likely be key topics of interest when NAB releases its Q3 results.

ASX 200: NAB share price Source: Bloomberg

The NAB share price has been one of the best performing of the big four banks since January, rising a healthy 17% in that period.

Now, as we edge closer to the National Australia Bank Ltd’s third quarter trading update, its share price may come under pressure if the bank fails to live up to investor expectations.

Here are 3 key things that you should consider ahead of NAB's Q3 release, due out Wednesday morning.

The all-important CET1 ratio

In 2017, APRA – the prudential regulator for financial institutions in Australia – raised the required equity capital ratio (CET1) of the big four banks to 10.5%.

Since then, this has been a heavily scrutinised metric by investors, as the big four banks rush to meet APRA’s January 2020 deadline, to have a CET1 ratio at or above 10.5%.

Mind you, NAB looks well placed to meet APRA’s ‘unquestionably strong’ capital requirement ahead of this deadline. In March 2017 NAB reported a CET1 ratio of 10.1% and in the bank’s latest March update, we saw a healthy uptick in this ratio, with it reaching 10.4% just below APRA’s requirement.

NAB dividend outlook

Though the National Australia Bank Ltd cut its dividend by 16% in the first half – to significant investor disappointment – the bank has flagged that in the medium term it may consider raising its dividend.

At the time of writing and even with this cut considered, NAB still has an enviable dividend yield of 6.58%.

Regardless of this, any further indication of a dividend increase will likely be well received by investors when NAB releases its Q3 trading update.

Damage of the Royal Commission

Finally, the further impact (if any) that the Royal Commission has had on NAB’s bottom-line is likely to be a closely scrutinised area of the bank's Q3 trading update.

Indeed, this was a major sticking point for investors last week when the Commonwealth Bank of Australia reported their 2019 full-year results. Here, the biggest of big four noted that remediation costs had more than doubled in the past year.

On this topic we reported that CBA:

‘Paid out A$2.2 billion in customer remediation costs, up from A$1.0 billion the year prior.’

All up, this viciously cut into CBA’s bottom-line, as it saw its full-year cash profits come in 4.3% below the average analyst estimate.

As such, how NAB has been impacted by the Royal Commission beyond its first half results will likely be a close point of scrutiny for current and prospective investors.

For example, in the first half NAB reported strong cash earnings of A$3,279 million – when excluding remediation costs.

This picture deteriorates somewhat when you factor in the damage of the Royal Commission.

As was noted by Philip Chronican – the CEO at the time:

‘1H19 earnings include a further $525 million in customer remediation costs ($325 million in cash earnings).’

All up, this amounted to NAB recording A$2,694 million in statutory net profits for 1H19.

Whether these remediation costs have continued to build – and if so how significantly – will be a key point of concern for investors when the National Australia Bank Ltd releases its Q3 update to the market this Wednesday.

Click here to read our previous coverage of NAB’s upcoming Q3 earnings release.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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