On Wednesday, Nov 08, 2023, National Australia Bank (OTC:NABZY) Ltd. (NAUBF.PK, NABZY.PK, NAB.AX) reported a year-on-year increase in its annual cash profit for the fiscal year ending September 30th, which rose by approximately 9% to reach $7.731 billion, slightly below the projected $7.795 billion. This lift in profit was due to fast-rising interest rates and non-home loan revenues in the second half of the fiscal year. The bank's statutory net profit also climbed by 14.6% to $7.41 billion or 228.7 cents per share, up from last year's $6.89 billion or 205.6 cents per share, despite facing rising interest rates and inflationary pressures.
The bank's net operating income also saw an increase of 12.9%, reaching $20.654 million. In response to these economic challenges, NAB relayed the central bank's interest rate hike to variable rate borrowers and increased rates for savings and deposit accounts, intensifying household financial stress. However, the second half of the financial year saw a decline in NAB's performance, with cash earnings dropping by $409 million (10%), statutory net profit falling by 13.1%, and net interest income decreasing by 1.7% or $145 million compared to the first half.
On Tuesday before the earnings announcement, the Reserve Bank raised the cash rate to 4.35%, its 13th increase since May last year. CEO Ross McEwan elaborated on how escalated interest rates affected their first half performance and the fierce competition they faced in the second half of the year.
Throughout FY 2023, NAB experienced a softer financial performance due to various challenges including inflationary pressures and tighter monetary policy. This led to a significant increase in delinquencies and substantial credit impairment charges reported at $802 million due to volume growth, asset quality deterioration, and higher specific charges - a striking jump from FY22's $125 million.
Despite these challenges, NAB declared a rise in its fully-franked final dividend, which increased from 78 cents per share last year to 84 cents per share this year, a growth of 7.6%. The full-year dividend stands at 167 cents per share, up 10.6% from the previous year. Shareholders also received an interim dividend of 83 cents per share.
On November 8th, NAB reported declines across all its divisions with the personal bank division experiencing significant reductions due to competition impacting mortgage margins. Despite this, NAB's mortgage book remained flat over the year. NAB plans to redirect discretionary capital and liquidity towards its business and private banking division, which accounted for 43% of group earnings.
Despite economic uncertainties, McEwan remains optimistic. He noted business customers' resilience and an increase in term deposits, indicating peak interest rates. He also highlighted that many customers are preparing for potentially tougher times. NAB research indicates 40% of customers are budgeting for the first time, despite a slight uptick in loan arrears and stress levels.
NAB faces challenges such as slowing loan growth, intense competition, rising arrears from low levels, and cost pressures. Its expenses rose 9.1% over the year, disappointing analysts who expected a cost-cutting program announcement.
Despite these setbacks, NAB saw growth in other divisions. The Business and Private Banking division reported a cash earnings increase of 10.1% to $3,318 million, showcasing NAB's sustained profitability despite the financial turbulence. Additionally, the Corporate and Institutional Banking business saw a cash earnings increase of 14.9% to $1,870 million.
On November 8th, NAB shares peaked since Oct. 18 at A$29.660, up 1.7%, boosting ASX 200's 0.6% ascent. However, UBS rated NAB as "sell" at A$26.00, foreseeing H1 '24 underperformance based on company guidance and earnings run rate. Citi issued a "neutral" rating at A$27.50, predicting FY24 costs to outstrip consensus' ~3% growth estimate and highlighted potential valuation impacts due to higher costs, weak revenue, and margin pressures. Analysts held varied views with six favoring "buy" or higher, four maintaining "hold", and four suggesting "sell" or lower; their median price target stood at A$28.71.
The New Zealand division also reported an 8.5% increase in cash earnings to NZ$1,522 million. Despite a softer second half performance due to intensifying mortgage competition and rising interest rates, CEO Ross McEwan remains cautiously optimistic about the future.
As part of its future plans, NAB intends to complete a $1.5 billion on-market buy-back. The bank has taken a measured approach to Australian housing growth due to an economic transition that has further to go. Over the last 12 months, the NAB share price has declined by approximately 8%.
Despite these challenges and a modest level of arrears and delinquencies, McEwan remains confident in the economic outlook. He emphasized the bank's prudent balance sheet settings and expressed confidence in navigating the ongoing economic transition, highlighting attractive long-term sustainable growth opportunities in a resilient Australian economy.
Furthermore, NAB's net interest income rose from A$14.84 billion to A$16.81 billion while other income increased from A$3.73 billion to A$3.84 billion, contributing to its overall profitability for the fiscal year 2023. Despite these challenges, McEwan suggested potential for passive income from shares and noted that NAB was recognized as the best among local banks.
To adapt to changing customer preferences, NAB plans to simplify digital banking experiences and reported that in 2023, 74% of customers opened simple everyday banking products digitally. In addition, NAB launched "Greener for Business," a digital product aimed at helping customers reduce carbon emissions.
NAB anticipates a continued slowdown in Australia's economic growth due to weakened household consumption and increasing cost of living pressures but predicts that Australia will avoid a severe economic downturn.
InvestingPro Insights
In light of the recent performance of National Australia Bank (NAB), InvestingPro offers two relevant tips and three key data points.
Firstly, InvestingPro Tip 0 notes that NAB's revenue growth has been accelerating, which aligns with the bank's reported year-on-year increase in annual cash profit. Secondly, InvestingPro Tip 1 points out that the bank has been consistently increasing its earnings per share, which is reflected in the rise of its fully-franked final dividend from 78 cents per share last year to 84 cents per share this year.
Looking at the data, NAB's Market Cap stands at 2.16M USD, and the P/E Ratio is at 144.29, suggesting a high valuation relative to earnings. The bank's Gross Profit Margin over the last twelve months as of Q4 2022 was at 10.75%, indicating a potential area of concern given the weak gross profit margins. Lastly, the bank's 1 Year Price Total Return as of the end of 2023 was 2.02%, suggesting a modest return for investors over the past year.
These insights are among hundreds available through InvestingPro's extensive suite of tools and resources, designed to support informed investment decisions.
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