- National Australia Bank (NAB) has reported FY18 cash earnings of $5.702bn, 0.7% better than our forecast – the composition of the result was broadly in line with our expectations.
- The final dividend is unchanged at 99 cents per share fully franked, in line with our expectation.
Good margin management at the group level is commendable
NAB has to be commended for disciplined margin management at the group level, and thus far such discipline has meant that NAB has not needed to increase its variable home loan rates in Australia (unlike the other major banks). The group Net Interest Margin (NIM) was assisted by 5bps NIM improvement in the NZ division and a stable institutional NIM from 1H18 to 2H18.
On the volume front, strong loan growth in Small and Medium-Sized Enterprises (SME), institutional banking and New Zealand is driving group loan growth and these are particularly valuable drivers given a backdrop of slowing Australian home loan growth.
Result should serve to allay some investor concern
Given elevated investor concerns about slowing Australian housing credit growth and tighter serviceability assessments, we believe the following Australian home lending observations from NAB's result should serve to alleviate some of the concerns:
- New fundings and drawdowns increased by 5% from 1H18 to 2H18;
- pre-payments increased over the same period;
- the average loan size at drawdown increased from 1H18 to 2H18;
- first pass approval rates in FY18 were in line with FY17;
- the median time to unconditional approval has improved from 12 months ago; and
- only one material change was made to credit settings in FY18 with the LTI limit being reduced from 8x to 7x.
3-year plan is progressing well
It is pleasing to see that NAB is continuing to target >1$bn of cost savings by end-FY20F. FY18 cost savings of approximately $320m are broadly consistent with this target, and the cost savings do not appear to have caused any notable damage to any of the business divisions thus far in terms of their ability to generate revenue. If the >$1bn target is hit without compromising revenue generation then we would view that as a commendable achievement, and this factor is a source of upside risk to our FY21 earnings forecasts.
We have reduced our cash earnings per share forecasts by 2.1% in FY19F and 3.0% in FY20F, largely due to lower Markets income forecasts. Our 12 month share price target has been reduced slightly (Morgans clients can login to view). Key downside risks to our target price include a material increase in funding costs and greater-than-expected asset quality deterioration.
We retain our Add recommendation.
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