NAB
Recommendation
National Australia Bank has announced its first quarter trading update (it has a 30 September year end), with unaudited cash earnings increasing 4% to $1.5bn compared to the same period last year. Statutory earnings fell 27% to $1.3bn due to hedging losses (these often swing around without impacting underlying profitability).
Revenue increased 3%, while expenses increased 4% despite cutting 500 positions during the restructure of the company’s problematic UK division. Banks are having little trouble borrowing money from yield-starved investors abroad, and bad debts fell 10% to $554m.
Unlike its three major rivals, NAB’s share price still trades at 2000 levels despite increasing 70% since falling below $17 in March 2009. While the UK businesses are a thorn in the company’s side, absent a major economic downturn the immensely profitable Australian business should support dividends. Low interest rates and high employment are also keeping housing prices and incomes high and bad debts low.
With a price to book ratio of around 1.6 and 6.3% fully franked dividend yield, statistically at least NAB is the cheapest of the big four banks. Our preference remains Commonwealth and Westpac due to their larger deposit bases, focus on Australia and smaller corporate loan books, but we’re cognisant that NAB could produce higher returns if the performance of the UK division improves and its grab for market share in Australia increases revenue without significantly increasing bad debts.
We’ve increased the prices in the recommendation guide as loyal shareholders may finally be on the cusp of banking some capital gains. With the share price increasing 18% since What will NAB be worth in 2017? Pt 2 from 3 Dec 12 (Hold – $24.22) we recommend you HOLD.