‘Intense mortgage competition’ to reduce bank margins

In research notes, Morningstar analyst David Ellis provided an overview of NAB’s performance following the release of the group’s third-quarter fiscal 2016 trading update this week.

Mr Ellis described the profit result as a “slight miss” with the big four bank’s $1.6 billion unaudited cash profit down 3 per cent on the $1.66 billion average for the first two quarters.

“We reduce our previous fiscal 2016 profit forecast to $6.68 billion, down from the previous forecast of $6.81 billion,” he said.

While he remarked that there were “no surprises” in NAB’s trading update, Mr Ellis did highlight that the bank’s strong lending growth is offset by lower net interest margins (NIMs). He added that NAB’s home lending is up just 3 per cent over the year to 30 June compared to all-bank total growth of 7.4 per cent.

“NIM for the three months to 30 June was undisclosed but we estimate a NIM of approximately 1.91 per cent for the quarter,” he said.

“First-half fiscal 2016 NIM was 1.93 per cent and we maintain our full-year fiscal 2016 forecast of 1.90 per cent. NIM is under pressure from higher funding costs, intense mortgage competition, and historically low interest rates reducing income on capital and high-quality liquid assets.”

Recent pricing of residential loans and certain longer-term deposits following the 3 August RBA rate cut will support margins, Mr Ellis said, as the bank’s residential mortgages exceeds the selected term deposit balances.

He added that, despite NAB’s bad debts increasing by 21 per cent over the quarter to $228 million, loan losses are still low and “best-in-peer-group”.

NAB’s ratio of nonperforming loans to gross loans (90 plus days past due and gross impaired assets to gross loans) increased to 0.81 per cent at 30 June this year from 78 basis points at 31 March.

Morningstar noted that this “modest deterioration” is spread across commercial and residential loans and “is in line with the sector trends” apparent in recent profit results of the other major banks.

“Given evidence asset quality is turning down, loan losses are expected to increase and we forecast a loan loss rate of 0.25 per cent by the end of fiscal 2020, close to NAB’s adjusted long-term average.”

[Related: Bad debts and margin squeeze hurts major bank profit]