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NAB focus is on long-term shareholder returns: Pitcher Partners

Posted on May 8, 2015

After a torrid week for bank investors, the market should be satisfied with the result that NAB has announced today.  Statutory net profit rose 20.4% to $3.44 billion, with the cash profit up a healthy 5.4% to $3.32 billion.

In releasing the result, NAB announced a number of strategic initiatives that help to reduce some of the uncertainty that the markets have had regarding the banks’ strategy.  With a renewed focus on the Australia & NZ businesses, NAB management outlined today the plan to exit the UK Banking business by way of a demerger and IPO.  To further stabilise the capital position of the bank, NAB have announced a $5.5 billion rights issue.  This strategy is in contrast to that of ANZ, who have adopted a “wait and see” approach to capital funding.  NAB management have decided to be pre-emptive, and improve the balance sheet of the bank in anticipation of further regulatory changes that have been well telegraphed to the capital markets.

As we have seen in other bank results this week, NAB has experienced downward pressure on the Net Interest Margin (NIM), with a decline of 2 basis points.  Of concern, the NIM for the Australian Banking operation is only 1.6%.  Earnings in the NAB Wealth division were strong, with cash earnings up 28.2% to $223 million.  Obviously a beneficiary of the improved market conditions, the operating expenses in this division were also lower which helped margins.

NAB shareholders have been rewarded with a 99c fully franked dividend, a discounted rights issue and participation in the demerger of the UK banking business.  The short term market reaction may focus on the fact that the Net Interest Margin has fallen, and the dividend has not been increased.  However, it appears apparent from today’s announcements that NAB are clearly focused on maximising long term returns for shareholders.  With a theoretical ex-rights price of $34.70, NAB is attractively priced and remains our preferred banking exposure.

NAB shares will remain in trading halt until the completion of the institutional component of the capital raising, or 12 May.

Comment from David Lane, director of Wealth Management at Pitcher Partners following NAB’s announcement on 7 May 2015