National Australia Bank (NAB) delivered a first-quarter FY22 cash net profit of $1.8bn, well ahead of the run-rate required to meet Ord Minnett’s first-half forecast of $3.2bn.
The strong performance from NAB would have been considered praiseworthy in any period, let alone at a time when peers have demonstrated significant net interest margin (NIM) pressure. This was highlighted by 5% revenue growth, excluding the Markets division – while peers were all negative in the December quarter or half – and the underlying NIM performance which at a 2bp decline half-on-half was well ahead of ANZ Banking Group (ANZ, Accumulate, at -4bp) and Westpac Banking Corporation (WBC, Hold, at -10bp) in the quarter, as well as Commonwealth Bank (CBA, Hold, at -9bp) in the December half.
What made the margin performance more compelling was that it came alongside strong loan growth of 3% quarter-on-quarter. Book mix (less mortgage exposure) played a part, although this performance mostly reflected greatly improved execution in both the retail and business banking businesses. In the small and medium-sized enterprise lending segment, NAB has a structural, scale-driven competitive advantage that looks impossible to replicate.
NAB saw 2% cost growth in the half, reflecting higher employee costs and investment to support growth. The bank continues to target broadly flat expenses in FY22, although it noted volume growth and emerging inflatioary pressures. Costs may rise from here, but we are comfortable with management planning for the long term and we see a strong case for consistent above-peer earnings growth, which we think justifies a rerating.
We have increased our EPS forecasts by 7% across the FY22–24 period, mostly reflecting revenue upgrades on much stronger than expected momentum in the first quarter and partly offset by assumed higher costs. Consistent with CBA, we now allow for earlier cash rate increases with the pull-forward to FY23, which has further supported our EPS revisions, offset by allowing for higher credit costs in FY24. We maintain our Accumulate recommendation and have raised our target price to $33.50 from $31.50. NAB remains our key preference among the major banks.
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.
Tags
NAB, National Australia Bank
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