First take of the NAB numbers

On first glance of the NAB numbers it’s easy to see why investors continue to flock to the big four as all bank record profits and dividends.

The final cash earnings of $5.936 billion was the thinnest of beats, with the street expecting $5.93 billion (medium estimate). NAB continues to build solid growth in lending, personal banking and wholesale banking. The bank also saw lower bad and doubtful debts and improved margins for personal banking which helped the bank register this final figure.  

The retail banking unit saw a 17.5% increase in cash profits as home lending finally broke through the 15% mark of the market. The result sees NAB becoming the third largest lender behind CBA and Westpac.

NAB’s business banking unit saw cash profits expand by 3.3% to $2.49 billion as the largest business banking lender this is flat figure and is slightly disappointing and is reflective of the business conditions over the year.

Net interest margins fell to 2.02% in the second quarter, from 2.07% in the first half of the year, and is nine basis lower year-on-year, however it did beat estimates of 2.01%. This was expected as competition ramped up and NAB has continued its competitive drive to stay ahead of the its competitors on rates and other fees and charges.

Return on equity rose 30 basis points to 14.5% on the record cash earnings, but was impacted by higher Basel III requirements and I would expect this figure to rise in coming years. While earnings per share jumped 4.9% year-on-year to $2.506.

The UK assets stabilised, posting a A$150 million profit from a A$2.13 million loss last year. However the property portfolio continues to weaken down to £4 billion from £5.6 billion a year ago.

However, as with all the banking results the dividend has been the biggest effect on investor sentiment. The final dividend of $0.97 was a cent ahead of expectations taking the full year dividend to $1.90. The final payout ratio of 75.1% was bang in line with expectations and that may excite the income investor looking for returns above the cash rate.

The market had shed NAB leading into today’s result; and reading into the detail there are still several increased costs across the UK assets and despite it stemming the flow of bad and doubtful debts. The UK payment protection insurance costs continue to etch out revenue and the UK assets appear to be the continued thorn in the side.

My initial impression is that it’s a solid result. The areas NAB has being concentrating on look like they are improving however there appears there are still some gremlins in the detail. Cost to income ratio was 42.3% which is pleasing and cost are coming down however it appears to still be hamstrung by legacy assets and the fact the bank has ran up some 47% over the previous 12 months the in line result may not be good enough.

I expect questions to be raised about long term profitability and where growth will come from, not just for NAB but for the class as a whole. Profit will always be there, but will growth? If investors want growing dividends then growing profits are needed and this is the question that most analysts are asking; where is that coming from as competition grows?

Trade suggestions

I have been a strong supporter of the banks over the past 24 months, NAB in particular. This result is probably not strong enough to see it legging higher, and with it turning ex-dividend on November 7 it will slide further still. On the medium term I see strength in NAB but expect short term weakness as investors switch to capital growth and out of income returns.

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