National Australia bank released their results for 1H 2016. They reported cash earnings of $3.31 billion, up 6.5% compared to March 2015 half year but 1.4% from 2H15. This is of course after the separation of the UK business. Pretty much in line with expectations.
Net operating income was up 2.0% from 2H15 to $8,923m, or up 3.3% from March 15.
Expenses rose 4.2%, reflecting investment in the Group’s priority customer segments and increased technology and personnel costs.
Underlying profit was up 2.0% from 2H15 to $5,092m, or up 2.7% from March 15. Excluding discontinued operations, statutory net profit increased 2.4%. The cash ROE was 14.1%.
On a statutory basis, net loss attributable to the owners of NAB was $1.74 billion, a decrease of $5.18 billion. This reflects discontinued operations losses, in particular the loss on demerger and Initial Public Offering of CYBG PLC of $4.22 billion as previously disclosed in NAB’s 2016 First Quarter Trading Update, combined with a charge of $801 million relating to provisions for conduct costs pursuant to claims under the Conduct Indemnity Deed with CYBG.
Whilst the business has been simplified, there is now reliance on the Australian business, and especially mortgage lending. We see increased lending balances, higher Group net interest margin (NIM), and stronger NAB Wealth net income, partly offset by weaker Markets and Treasury income. Group NIM rose 1 basis point, reflecting benefits of repricing in home lending and deposits, partly offset by higher wholesale funding costs and competition for business lending.
The ratio of Group 90+ days past due and gross impaired assets to gross loans and acceptances of 0.78% at 31 March 2016 compares to 0.63% at 30 September 2015 and 0.77% at 31 March 2015. Inclusion of A$522 million of New Zealand dairy impaired assets currently assessed as no loss based on security held accounted for 10 basis points of the increase in this ratio between 30 September 2015 and 31 March 2016.
The ratio of collective provision to credit risk weighted assets was 0.98% compared with 0.99% at 30 September 2015. The ratio of specific provisions to impaired assets was 36.4% compared with 30.3% at 30 September 2015.
The total charge for Bad and Doubtful Debts (B&DDs) was $375 million, down $24 million or 6.0%. However, compared to the September 2015 half year, the total charge increased $26 million or 7.4% reflecting higher specific provision charges in Australian Banking relating to a small number of large single name exposures, combined with increased collective provision charges for NZ Banking given the continued challenging outlook facing the dairy industry.
The Group’s Common Equity Tier 1 (CET1) ratio was 9.7% as at 31 March 2016, a decrease of 55 basis points from September 2015 mainly reflecting the impact of the CYBG demerger and IPO, including the conduct indemnity.
The Group’s CET1 target ratio remains between 8.75% – 9.25%. NAB is considering issuance of a new ASX listed Additional Tier 1 capital security, subject to market conditions, including any competing supply.
After the changes to ratio calculations from 1 July 2016, the pro forma March 2016 CET1 ratio will become approximately 9.3% taking account of revised mortgage risk weight increase (-80bps), wealth debt maturity (-8bps), and 80% sale of NAB Wealthʼs life insurance business for $2.4bn less separation and transaction costs (+50bps).
Leverage ratio is 5.3% on an APRA basis and 5.7% on an internationally comparable basis. The Net Stable Funding Requirement (NSFR), is estimated to be “slightly below” 100% target – subject to APRA’s final interpretation.
The interim dividend is 99 cents per share fully franked, unchanged from the 2015 interim and final dividends. The target payout range will be 70-75% – based on ROE and RWA growth expectations, although the 1H16 payout ratio was 78.8%. This ratio optimises the use of franking credits (after payment of the interim dividend, estimated franking surplus of $590m), although 1H16 payout falls to 69% after DRP (assuming 12% participation).
The Group maintains a well diversified funding profile and raised $17.7 billion of term wholesale funding in the March 2016 half year across a range of markets. The weighted average term to maturity of the funds raised by the Group over the March 2016 half year was 4.7 years. The stable funding index was 89% at 31 March 2016.
The Group’s quarterly average liquidity coverage ratio as at 31 March 2016 was 125%.
Looking in more detail at the segmentals.
Australian Banking cash earnings were $2,694 million, an increase of 5%. Revenue rose 4% reflecting higher lending volume…
… and improved NIM, partly offset by weaker Markets and Treasury income.
Expenses grew 6% due to performance based incentive normalisation, Enterprise Bargaining Agreement salary increases and higher project and technology costs. B&DD charges were $341 million, a decrease of 7% with lower collective provision charges including the non-repeat of an agriculture and resource sector overlay taken in the March 2015 half year partly offset by higher specific charges arising from a small number of large single name impairments.
Looking specifically at housing lending in Australia, growth was strongest via the broker channel, and the overall portfolio grew, with more than 57% of loans for owner occupation. Overall 39% of loans were interest only, with a bias towards the investment sector. NAB had 4,204 brokers under their owned aggregators, up from 3,700 a year before.
They have an interest floor rate of 7.4% and serviceability buffer 2.25% including on existing debt, whilst the maximum LVR is 95% for owner occupier and 90% for investor – lower for high risk postcodes and non-residents. Interest only lending repayments are assessed on the residual principal and interest period.
Lending to non-residents <2% of total housing book, the maximum LVR is 70% and shading applies to foreign income. NABʼs 1Q 2016 residential property survey suggests foreign buyer demand has stabilised, but remains elevated at 14% of national new property sales and 9% established properties.
Excluding offset accounts and interest only, line of credit loans and Advantedge loans, 62.1% customers are more than 1 month in advance.
There has been a reduction in high LVR ratio loans.
Delinquencies are low, but moving higher in some states, and the broker channel now matches proprietary channels. Portfolio 90 day+ is up from 0.45% to 0.51%, whilst impaired loans are 0.11%. 12 month rolling net write-offs/spot drawn balances are at 2 basis points.
NIM improved 5 basis points, mainly thanks to repricing.
NZ Banking local currency cash earnings declined 3% to NZ$404 million with higher B&DD charges the key driver. Revenue rose 2% with higher lending volumes partly offset by lower NIM.
Expenses were well contained rising 2% and compared to the September 2015 half year declining 1%. B&DD charges increased by NZ$38 million or 83% as a result of higher collective provision charges mainly related to the dairy industry.
Compared with the September 2015 half year B&DD charges declined 5%.
NAB Wealth cash earnings increased 12% to $249 million driven by stronger Insurance results. Net income rose 4% reflecting Insurance premium growth and pricing increases combined with improved claims expense and stable lapse performance.
Expenses declined 1%, due to lower technology and project costs partly offset by an increase in the number of financial planners.
So overall, NAB has become a simpler business, with more reliance on the Australian business. The key question is whether the local economy will have sustainable growth, whether the housing sector can continue to grow, whether losses will rise, and how individual banks deal with the intense competition for owner occupied mortgages. Clearer air perhaps, but still some clouds in the sky!
