National Australia Bank: Will be watching quality of home loan growth

About the author:

Azib Khan
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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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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