Ord Minnett Research Recommendation: National Australia Bank (ASX: NAB)
National Australia Bank delivered a third-quarter FY22 cash net profit of $1.8bn, below that implied in Ord Minnett’s forecast of $3.76bn for the second half, due mainly to a lower net interest margin (NIM).
Revenue in the quarter was slightly below our estimate, although this was offset partially by a better cost result, which came in 1% above the first-half quarterly average, albeit full-year guidance was increased to 3–4% growth given one-off factors. Fourth-quarter revenue growth should be stronger than the 3% growth in the third quarter, however, supported by: 1) a strong tailwind from interest rate increases late in the third quarter and early in the fourth quarter; 2) an extra day in the fourth quarter; and 3) likely consistent average balance growth.
NAB delivered very strong credit growth in quarter, with housing up 9% (3Q22 annualised) and business up 12%. Asset quality remained solid with a very low impairment charge of $11m booked on lower arrears rates. We continue to forecast higher impairments over the coming halves, which we expect will return to their long run average as higher interest rates and repayments put pressure on borrowers. while capital looked sound.
Other incremental news was slightly negative, with a 1-percentage-point lift in FY22 cost growth guidance due purely to one-off items, and softer markets income due to repurchase agreement (‘repo’) margin pressure and a lower than expected trading performance.
These factors have driven very modest earnings revisions. Our second-half NIM forecast has fallen slightly and, as mentioned above, we see elevated revenue growth for the next two halves. We have reduced our cash net profit forecasts by 2% for FY22, 0.5% for FY23 and 1.5% for FY24 due mainly to lower markets income, while our cost estimates are also slightly lower.
The bank is in good shape, in our view, and is highly likely to outstrip peer revenue growth over the next three years due to its execution and favourable lending mix. We maintain our Accumulate recommendation and have raised our target price to $32.70 from $30.50.
Walter Watson
RESEARCH EDITOR
Walter is the Editor of Ord Minnett's retail investor publications, such as the Opening Bell, Ords Weekly and the Ords Monthly, along with various investment guides and investor information published by Ord Minnett.