NAB: Q3 update
Recommendation
NAB has released a strong 2017 third-quarter update. Revenue rose 2% compared to the quarterly average of its 2017 interim result as a result of rising net interest margins. Funding costs have fallen while NAB, like all the major banks, has benefitted from out-of-cycle rate increases on home loans. NAB also increased its lending.
Expenses also rose 2%, compared to the first half quarterly average, but 1% on an underlying basis due to increased investment spend.
Without a repeat of the collective provision raised against commercial real estate in the 2017 interim result and also due to improving asset quality, bad debt expense fell 12%, to $173m. Our friends across the ditch are benefitting from an improving New Zealand dairy sector.
The result of all this was that cash earnings rose 5% compared to the first half quarterly average but a more mundane 2% versus the prior corresponding period.
Excluding the estimated $375m pre-tax cost of the recently announced bank levy, $200m in expected savings means CEO Andrew Thorburn is confident of achieving ‘positive jaws' – revenue rising faster than expenses – for the 2017 full year.
NAB's common equity tier one ratio (CET1) fell to 9.7% as a result of the interim dividend and a 0.17% increase in mortgage risk-weights as a result of NAB tweaking its risk-weight calculations. Nevertheless, NAB remains in a comfortable position to satisfy ARPA's announcement finally defining ‘unquestionably strong' as requiring a CET1 ratio of at least 10.5% by January 2020.
NAB has risen 25% since we upgraded to Buy around a year ago and it remains a HOLD.
*Please note our recommended maximum portfolio weightings of 10% 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.