NAB investment encouraged by new report

According to a Fat Prophets report to its members, now is the time to be looking at NAB as an investment as it continues to press ahead with its plan to divest underperforming assets. 

“In our view, the key takeaways from National Australia Bank’s 1H15 results are that the bank’s (i) core businesses are performing well, with this reflecting management’s increased focus on customer service, particularly with respect to NAB Wealth, which is benefitting from its closer integration with the bank’s other segments (ie. Australian Banking); (ii) [the] troubled UK business is starting to show signs of stabilisation, and perhaps even a return to growth; and (iii) management’s decision to progress the proposed demerger of its UK business in order to focus on the bank’s core businesses,” the report said.

Mortgage Business reported in early July that NAB announced it is investigating a demerger and initial public offering of Clydesdale Bank.

The Fat Prophets report also added that domestic factors are increasing the desirability of NAB shares.

“The bank is well advanced in its quest to pre-empt the regulatory (ie. Australian Prudential Regulation Authority) requirement for a hike in the CET1 ratio to around 10 per cent,” the report noted.

NAB said recently that a strong balance sheet has always been a priority, and since June 2014, it has increased its CET1 ratio from 8.46 per cent to approximately 10 per cent following the completion of its $5.5 billion rights issue in May, and “taking into account the finalisation of other near-term major initiatives”.

“Total capital ratios have increased by a larger margin over this same time period. This increase represents a CET1 capital buffer of approximately 100 basis points to the midpoint of NAB’s 8.75 per cent to 9.25 per cent CET1 target operating range,” the bank said.

“As a result, NAB is well placed to respond to changes in regulatory capital requirements.”

The Fat Prophet report noted that NAB’s valuation relative to its major domestic peers is the final reason why shareholder investments in NAB should be encouraged.

“Based on the market’s consensus earnings estimates for the Australian banks, National Australia Bank is trading at 13.0 times the rolling 12-months forward consensus earnings estimate. While this represents a premium to ANZ Bank’s multiple of 12.1 times, it is comparable to Westpac Bank and a marked discount to Commonwealth Bank of Australia,” the report said.

Looking ahead, the Fat Prophet report predicts that the way shareholders view NAB will begin to shift, prompting greater investment in the bank.

“While generally considered, along with ANZ Bank, as the poor cousin or laggard amongst Australia’s major banking stocks, we believe this could be about to change. If National Australia Bank can succeed in bridging the gap between its cash return on equity and that of its major peers, we believe the bank’s shares will outperform the market,” the report concluded.