- National Australia Bank (NAB) has reported 1H17 cash earnings of $3.294m, 1.5% better than our forecast and approximately 2.2% better than the consensus forecast. An interim dividend of 99cps has been declared in line with our expectation.
- Stronger-than-expected CET1 capital ratio reduces the risk of a dividend cut.
- Earnings per share tailwinds are building for NAB and for the major banks sector.
Strong capital position buffers dividend
The Common Equity Tier 1 (CET1) capital ratio of 10.1% at Mar-17 has come in stronger than our forecast of 9.7%. Sub-system home loan growth, continued shrinkage of the institutional loan book and hedging of certain derivative-related credit risks assisted the strong outcome. The improved capital position significantly reduces the risk of a dividend cut in our view and places NAB in a better position to deal with potential increases in regulatory capital requirements.
Net Interest Margin (NIM) in line with expectations
NAB's NIM of 182bps for 1H17 was unchanged from 2H16 and was in line with our expectation. This reinforces our view that the NIM disappointment in ANZ's result was largely due to company-specific factors as opposed to sector-wide headwinds. While ANZ's Liquidity Coverage Ratio (LCR) jumped significantly to 135% at Mar-17 (and was a NIM headwind), NAB's group LCR was up very slightly to 122%. Again, we believe much of the jump in ANZ's group LCR relates to its run-off and exit of certain Asian portfolios.
Positive jaws guidance reaffirmed
NAB delivered positive jaws for the 1H16-1H17 period with income growth of 1.8% and expense growth of 0.8%. They have reaffirmed guidance of positive jaws for FY17 and we continue to be of the view that this will be achieved.
Enough to be upbeat about looking ahead
We continue to be of the view that Earnings Per Share (EPS) tailwinds are building for NAB and the major banks as a whole. We expect all four major banks will experience NIM expansion from 1H17 to 2H17 largely due to home loan re-pricings and reduced term deposit spreads. Run-off of low-returning institutional loan exposures across all the major banks is assisting capital positions and providing support to dividends.
The credit quality environment remains benign and the improving outlook for NZ dairy credit quality creates potential for collective provision releases in 2H17 and FY18. This factor is particularly relevant to NAB as it is the only major bank on International Financial Reporting Standard 9 (IFRS 9).
We have increased our cash EPS forecast by 0.3% in FY17F, but have not materially changed our cash EPS forecasts beyond that. Key downside risks include material widening in relevant credit spreads and greater-than-expected asset quality deterioration.
Our share price target remains unchanged and we retain our Add recommendation.
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