Going with the flow | National Australia Bank (ASX:NAB) Share Recommendation

Ord Minnett Research Recommendation:   National Australia Bank (ASX: NAB)  

Second-half FY22 cash earnings from National Australia Bank were right in line with consensus estimates but around 3% below Ord Minnett’s top-of-market forecast. A final dividend of $0.78 per share was declared.

Stripping out higher than expected one-off items and lower markets income, revenue was 1.5% below our estimate, while costs were in line. Net interest margin (NIM) trends failed to surprise to the upside, as they did for ANZ Bank (ANZ, Accumulate) and Westpac (WBC, Restricted).

Despite the conjecture on underlying NIM trends versus these banks, when we strip out the Citibank assets acquisition, net interest income growth (excluding markets) was 10% half-on-half, in line with Westpac and slightly below ANZ (up 12%), which benefits more from rapid New Zealand and US interest rate rises.

Funding headwinds were a point of difference versus rivals, which may reflect stronger loan and deposit growth for NAB. NAB’s leverage to rising interest rates in the early part of the rising cycle has looked low against peers, but asset pricing headwinds are smaller, suggesting there will be less NIM decline in outer years.

Our cash net profit forecasts have been reduced by 5% in FY22 and 1% in FY23. Our operating expenditure estimates have increased 2% in FY23 and FY24, while our revenue forecasts have fallen by 3% in FY23 due to a lower NIM and lower markets income, but are unchanged in FY24.

Cost headwinds are more significant in FY23 and we estimate cost growth of 4%, excluding the Citigroup assets, given material productivity savings as a partial offset. NAB’s return on equity profile profile, loan book mix and momentum look attractive to us. This has led us to maintain our Accumulate recommendation and increase our target price modestly to $33.80 from $33.70.