NAB: Interim Result 2019

We warned a year ago that NAB was the most likely of the big four to cut its dividend, and so it has proved. The strain then was the result of a heavy investment program and the bank already having the highest payout ratio among the big four. Conditions in the banking sector have deteriorated since then, so a 16% cut in the interim dividend to 83 cents per share (fully franked) is a sensible move.

The overall result could fairly be characterised as flat, with revenue up 1% to $9.2bn and cash earnings flat at $3.3bn, excluding customer remediation costs of $325m for past misdeeds uncovered by the Royal Commission.

Between the divisions, however, the results were mixed. Retail banking is under the most pressure, with margins on home loans shrinking and impairments rising, albeit off a low base. As a result, revenue fell 6% to $2.6bn and cash earnings slumped 21% to $0.6bn.

The business banking and institutional divisions fared better. The former saw revenue up 1% to $3.3bn but cash earnings fall 1% to $1.5bn. Lending grew 5% for businesses and margins were flat, though that was offset by higher impairment charges. The institutional business experienced a 3.3% increase in revenue to $1.7bn while cash earnings were stable at $0.8bn.

New Zealand, however, was the standout performer, thanks to a combination of higher margins, increased lending, and flat impairment charges. That pushed revenue and earnings up 6% and 8%, respectively, to NZ$1.3bn and NZ$0.5bn. NAB may need to put more capital into its NZ business under a proposal by the local regulator to increase Tier 1 capital to 16% of risk-weighted assets - an additional NZ$4bn-5bn based on present loan levels.

The potential need for more capital will be supported by lower dividends and a partially underwritten dividend reinvestment plan to raise up to $1.8bn. That will help boost the bank's common equity tier 1 capital level beyond the present 10.4%, which is 0.1% below the regulatory requirement for the start of 2020.

Beyond the numbers, NAB is making technology improvements and following a tough cost-cutting program. The plans are on track but the bank is likely to spend another $1bn before the benefits can be counted. Such large programs rarely go smoothly and the fact that NAB is still to announce a new chief executive adds to the risks. A prospective dividend yield of over 6% even after the cut goes some way to offsetting them, although we'd want to see it over 7% before upgrading. HOLD. 

Look out for a comparison of the major banks' results after they've all reported over the next couple of weeks.

*Please note our recommended maximum portfolio weightings of 8% for NAB individually and 20% for the banking sector as a whole. More conservative investors and those with other exposure to the property market should use lower limits.