National Australia Bank: Thematically encouraging

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Former Senior Analyst
Date posted:
17 February 2021, 11:00 AM
Sectors Covered:

  • National Australia Bank (ASX:NAB) has announced unaudited cash earnings of $1.65bn for 1Q21, which, on a run-rate basis, is 10% better than our expectation and ~33% better than FactSet consensus.
  • Despite us appearing to have the most optimistic credit impairment charge forecasts on the street for the major banks, we had been pointing out the upside risk that charges for the Dec-20 quarter may be significantly lower than even what we expect. This has turned out to be the case for NAB, and bodes well for the Dec-20 quarter trading updates from WBC tomorrow and ANZ on Thursday.

Minimal credit impairment charge for 1Q21

The cash earnings beat is largely the result of a much lower than expected credit impairment charge.

The 1Q21 charge of $15m is, on a run-rate basis, significantly better than our previous 1H21 forecast of $517m.

NAB has said that improving economic trends have been a key driver of this outcome. Collective provision coverage (CP) of credit risk weighted assets (CRWA) reduced 1bp to 155bps from Sep-20 to Dec-20.

NAB has said that asset quality remained broadly stable over 1Q21, with the ratio of 90+ days past due and gross impaired assets to gross loans and acceptances declining 2bps to 1.01% over 1Q21.

We have reduced our 1H21 credit impairment charge forecast to $248m.

Revenue up excluding Markets & Treasury

On a run-rate basis, revenue (excluding large notable items) declined 3% from 2H20 to 1Q21 reflecting lower Markets & Treasury income mainly due to the non-repeat of markto-market loss reversals in 2H20.

Excluding Markets & Treasury, revenue grew 1% with higher fees and commission income benefitting from increased levels of business activity.

NAB has said that the net interest margin (NIM) declined from 2H20 to 1Q21 without quantifying this decline.

However, the NIM was stable from 2H20 to 1Q21 excluding the impact of Markets & Treasury and higher liquids.

Competition and the impact of low interest rates were offset by home loan repricing and lower funding and deposit costs.

Increasing potential for capital management

Similar to what was seen in CBA’s result last week, we expect NAB to revise its central estimate for the adverse impact on the CET1 ratio from CRWA migration to be nil when it reports its 1H21 result.

It appears that NAB did not experience any net adverse CRWA migration over the Dec-20 quarter. We have consequently favourably revised our CRWA forecasts, resulting in higher CET1 ratio forecasts.

We are now forecasting a CET1 ratio of 12.5% by end-FY23F, as a result of which we see potential for capital management over our forecast period.

Investment view and changes to forecasts

We have increased our cash EPS forecasts by 3.7%/2.1%/2.4% for FY21F/FY22F/FY23F respectively largely due to higher loan balance forecasts across all years and a lower credit impairment charge forecast for FY21F.

We now also expect DRPs to be neutralised over our forecast period.

We retain a Hold recommendation (Morgans clients can login to view detailed reports and price targets). 

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