We were delighted to host Group CEO of National Australia Bank, Andrew Thorburn, in the Shaw and Partners Melbourne office this morning. Andrew presented the highlights of the 1H17 financial results to our Retail and Institutional Brokers. The presentation was hosted by our Senior Analyst, David Spotswood.

Presentation highlights:

Revenue growth – The outlook for revenue growth for the banks is softer, with a lot of competition and credit growth in housing likely to slow from regulatory pressures. Management see opportunities for business growth to lift with business confidence high, low interest rates and businesses being lowly geared. Ex commercial real estate, core business lending is growing at ~5%-15%, which is good. NAB are expecting GDP growth of around 3%. NAB see 3%-4% business growth and 5% housing growth. We have less than this, and assume 3% credit growth for NAB in our forecasts.

House Prices – Management are expecting macro prudential limits a slowdown in house price growth with  some pockets falling. This is what happened in Auckland when the regulator introduced macro prudential limits there. The issue for the regulator is that house price growth is only very strong in Sydney and Melbourne, not the whole country. There is underlying demand for housing which is pushing prices up.

Margins – Over the last twenty years margins have trended down. Going forward expect margins to be flat, following home loan rate increases late in 2Q. We are expecting NAB’s margins to go up.

Capital/Dividends – NAB’s capital levels and dividends are a function of credit growth and Return on Equity. We expect NAB can hold the dividend flat at $1.98. NAB is being prudent, and managing its balance sheet carefully. Ex the $90m overlay, NAB’s bad debt charge as a percentage of gross loans was 12bps, which is very good.

Forecasts – If we use flat margins and NAB’s view on credit growth, our numbers are around 2% too high.  

Recommendation: Shaw and Partners has a hold on the stock. We think NAB has done a good job in shedding low returning assets and lifting ROE. Stock looks fully priced to us but it does have a great yield, investors looking for a yield stock can own NAB. We wait for better opportunities to buy.

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