National Australia Bank: Will be watching quality of home loan growth
About the author:
- Author name:
- By Azib Khan
- Job title:
- Former Senior Analyst
- Date posted:
- 26 October 2021, 8:30 AM
- Sectors Covered:
- National Australia Bank (ASX:NAB) is scheduled to announce its FY21 result on 9 November 2021. We are forecasting cash earnings from continuing operations of $6,597m, which appears to be broadly in line with consensus.
- We are forecasting a final dividend of 64cps fully franked.
- Retain Hold recommendation.
Looking for above-system home loan growth
APRA data shows that NAB has grown its Australian home lending by 3.2% from Mar-21 to Aug-21, compared with system home loan growth of 3.0% over the same period.
As part of its Jun-21 quarter trading update, NAB said that Australian SME lending grew 4.3% over the quarter. We infer from APRA data that there has been continued growth in NAB’s Australian SME lending since June such that we expect 5.5% SME loan growth over 2H21.
Will be watching impact on NIM of composition of home loan growth
We are forecasting NIM contraction of 1bp from 1H21 to 2H21; however, we see downside risk on this front particularly as we suspect that NAB may have relied more heavily on fixed rate home lending than major bank peers to drive home loan growth.
NAB said at the time of its Jun-21 quarter update that its headline NIM was broadly stable from 1H21 to 3Q21; and that excluding Markets & Treasury, the NIM increased modestly over this period.
Based on APRA data, we suspect NAB will lag ANZ and WBC in terms of Australian low-cost deposit growth from Mar-21 to Aug-21.
Forecasting expenses to be at top end of guidance
Excluding notable items, NAB has said that it is targeting FY21 expense growth of 0-2%.
We are forecasting expense growth of 2.0% in FY21, and given that this is at the top end of guidance, we see upside risk to our forecast. If the 2H21 NIM is weaker than our expectation, then we expect expense growth to be less than our expectation.
Credit loss provisioning
We are forecasting a credit impairment benefit of $99m in 2H21. NAB has already disclosed a credit impairment benefit of $112m for 3Q21, meaning that we are forecasting a credit impairment charge of $13m for 4Q21.
We see upside risk to our forecast on this front as we believe NAB can further reduce its collective provision coverage of credit risk weighted assets. NAB’s coverage was 1.37% at Jun-21, compared with 1.30% for WBC and 1.24% for ANZ at the same point in time.
Investment view and changes to forecasts
We have made no changes to our forecasts.
Our price target, based on our DDM valuation, is unchanged at (login to view).
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