NAB – Page 21 – Digital Finance Analytics (DFA) Blog

NAB Wealth refunds additional customers

Following an independent review, NAB has refunded customers who were impacted by errors dating back to 2001 and are centered on processes and controls relating to Navigator – a platform NAB inherited from the Aviva acquisition in 2009.

ASIC said National Australia Bank’s wealth management business (NAB Wealth) has announced the resolution of its compensation program due to issues with its Navigator Wrap platform, with $25 million in compensation to be paid to approximately 62,000 customers. The issues relate to tax estimation and income estimation errors on its Navigator Wrap platform.

Following ASIC’s request, NAB Wealth appointed PriceWaterhouse Coopers to independently review the payout process, systems integrity and breach reporting and governance.

Commissioner Greg Tanzer said, ‘ASIC expects banks to vigilantly monitor their platforms for issues such as this. Any issues identified should be swiftly and pro-actively reported to ASIC, with a view to promptly compensating customers.’

ASIC acknowledged NAB Wealth’s cooperation in this matter.

In NABs statement, they said as part of this review, NAB has identified errors and processes dating back to 2001, which was prior to NAB’s 2009 acquisition of Aviva, which included the Navigator platform, and when Aviva was eventually integrated into the NAB business in 2011.

These errors and processes relate to how income and tax was being allocated to customers’ accounts on closure. This resulted in surplus monies being held within the Navigator Platform Funds for the benefit of fund customers, rather than being attributed at the individual customer account level. At no stage have these monies been held by, or accounted for, as part of the assets of any NAB Group company.

The review undertaken by NAB over the past 12 months has now resolved this, with all affected customers to be paid their due allocations. In total, approximately 62,000 customers will receive funds to the value of approximately $25 million.

One-third (34%) of customers will receive a payment of $50 or less, 50% of customers will receive less than $100, and 75% of customers will receive less than $350. The average payment per customer is $400, which includes interest.

Group Executive, NAB Wealth and CEO of MLC, Andrew Hagger said that NAB will write to customers and advisers over the coming weeks to explain this legacy issue and what NAB has done to fix the problem.

“NAB Wealth has applied significant focus to our breach identification and reporting processes, which is what led to NAB originally reporting this legacy issue to ASIC,” Mr Hagger said.

“These errors date back to 2001 and are centred on processes and controls relating to Navigator – a platform NAB inherited when we acquired Aviva in 2009. Our teams have worked extensively, with oversight by PwC and ASIC, to ensure the right processes, systems and controls are now in place.

“While this is a legacy issue, we took deliberate steps to make absolutely sure we could get the fairest outcome for our customers.

“These errors are in no way related to the quality of NAB Wealth’s advice to its customers.”

The only customers impacted are customers who closed their accounts on the Navigator platform between 30 September 2001 and 30 April 2015. The majority of money now being distributed to customers is being distributed from within the Navigator Platform Funds to the entitled customers. Given that the majority of the $25 million is being reallocated from the Navigator Platform Funds, this payment is immaterial to NAB.

Foreign Property Buyers Still Active – NAB

The NAB Residential Property Q2 Report shows that the index is weighed down by slowing rents. Eastern states out-performing, with NSW and Victoria expected to lead price and rental growth over the next 1-2 years. Foreign buyers less active in new property markets, but despite tougher restrictions on foreign investment, increase their presence in established markets, especially in Victoria. For the first time the Survey also distinguishes between foreign buyers in apartment and housing markets.

The NAB Residential Property Index fell -4 to +17 points in the June quarter as a slowdown in rents offset continued capital growth.

But, the picture remains mixed across the country.

NAB Group Chief Economist Alan Oster said: “Overall sentiment improved in Victoria and remained solid in NSW, but fell in all other states and quite heavily in SA and WA, with both states printing their weakest index result since the survey began”.

Looking forward, property professionals in NSW are now the most optimistic in the country (replacing QLD), closely followed by Victoria. In contrast, WA is the most pessimistic in the country and more so than in the last survey.

Expectations for national house price growth over the next 1-2 years were unchanged at 2.1% and 2.3%, but improved outlooks for capital growth in NSW and Victoria are offsetting weaker expectations in all other states.

“The survey also suggests that faster capital growth will push yields lower as rental growth continues to slow over the next 1-2 years” said Mr Oster.

Foreign buyers pulled back a little in new property markets in Q2, with their share of total demand falling to 12.8% (15.6% in Q1), with buyers less active in Victoria (18.1%) and NSW (13.1%).

In existing housing markets, however, foreign buyers were more active with their share of national demand rising to 8.6% (7.5% in Q1), with foreign buyers accounting for more than 1 in 10 sales in both Victoria and NSW.

For the first time the Survey distinguishes between foreign buyers in Australian apartment and housing markets.

In the new property market, property professionals estimated that foreign buyers accounted for 16.1% of all apartment sales and 11.5% of house sales in Q2.

“There were however, some big differences between the states, especially in the apartment market where foreigners purchased more than 28% of all new apartments in Victoria, compared to just 16.5% in NSW. There was much less divergence in new housing markets” said Mr Oster.

Despite stricter restrictions on foreign investment in the established residential property market, the survey suggests foreign buyers also play a fairly significant role in this segment of the Australian housing market.

Foreign buyers accounted for 11.4% of all established apartment sales and 9.4% of house sales in Q2.

According to Mr Oster: “It was however notable that foreign buyers had a much bigger presence in the established housing market in Victoria, with a market share of just over 16%. This was much higher than in all other states. Interestingly, the Survey also reported a much higher share of foreigners buying dwellings or land (23%) for re-development in Victoria”.

In terms of local buyers, first home buyers were more prevalent in new property markets in the June quarter (accounting for more than 1 in 4 property sales) although this increase was mostly due to first home buyer investors.

Owner occupiers or up-graders were also more active in both new and established markets, while resident investors (net of FHBs) accounted for just over 1 in 5 sales in both new and established markets.

NAB Economics is forecasting average national house price growth of 6.1% through the year to end-2015, although wide variance in capital city performance will persist. Capital growth is expected to be led mainly by Sydney (10.2%) and Melbourne (6.5%), with modest gains also forecast for Brisbane (4%) and Adelaide (0.9%). In Perth, house prices are expected to fall -3.8%.

Average national house price growth is expected to moderate in 2016 to 3%. NAB Economics expects prices growth to accelerate in Brisbane (4.8%), remain steady in Adelaide (0.9%) and fall in Perth (-0.1%). In contrast, house price growth is forecast to slow in both Sydney (3.9%) and Melbourne (3.1%).

NAB Validates DFA Research On Property Investors

The recently released Quarterly Australian Residential Property Survey Q1 2015 from NAB, included some data which chimes with DFA research (and highlights again that the FIRB do not have their figure on the overseas investor pulse).

First, with regards to First Time Buyers, NAB says that the say that around 1 in 4 purchases are being made by first home buyers (FHB), both as “owner occupiers” but also as “investors”. FHB going direct to the investment market was a theme we covered on the blog.

First homebuyers (FHBs) still account for around 1 in 4 of all new property sales, but the share of demand from FHBs owner occupiers fell to 14.7% while FHBs investors rose to 10.1%. Owner occupiers were broadly unchanged at 33.1%, while local investors were down slightly to 24.1%.”

Second, Foreign buyers were more active in new housing markets, accounting for 15.6% of demand.

“There was however a notable shift in activity by location with the share of foreign buyers in NSW rising to a new high of 21% and falling to 20.7% in Victoria (from 33% in Q4 2014)”

In contrast, foreign buyers were less active in established housing markets, with their share of national demand inching down to 7.5% (8.7% in Q4’14).

Foreign buyer demand fell notably in Victoria (8.6%) and to a lesser extent in Queensland (5.1%), but increased slightly in WA (6.1%) and was broadly unchanged in NSW (11.2%).

Nationally, 53% of all foreign purchases were for apartments, 30% houses and 17% for re-development. The bulk of foreign buyers (41%) spent between $500k to <$1 million, with 30% buying properties less than $500k and 5% buying premium property in excess of $5 million.

Once again, this chimes with our research, when we showed a similar level of activity below $1m, and significant foreign investor activity in Sydney and Melbourne.

Owner occupiers are still dominating demand for established property with a market share of 42.4% (42.6% in Q4’14), followed by local investors with a 21.6% share (22% in Q4’14). Property professionals estimate FHBs (owner occupiers) accounted for 15.8% of total demand for established property in Q1’15 (16.1% in Q4’14), with FHBs (investors) making up 10% (9.3% in Q4’14). Foreign buyers were less active in this market in Q1’15, with their share of national demand inching down to 7.5% (8.7% in Q4’14). Foreign buyer demand fell notably in VIC (8.6%) and to a lesser extent in QLD (5.1%), but increased slightly in WA (6.1%) and was broadly unchanged in NSW (11.2%).

At the national level, capital growth expectations for the next 12 months have strengthened in all price ranges in both the housing and apartment markets. Capital growth expectations are assessed as “good” for all houses below $2 million and for apartments below $1 million. Expectations for capital growth at all other price points are assessed as “fair”. By state, expectations for capital growth continue to be strongest in NSW at all price ranges in both the housing and apartment markets, and significantly stronger for apartments valued at below $ 2million. In contrast, capital growth prospects are clearly lagging in WA at all price points, but especially at price points above $2 million, where prospects are considered “poor”

NAB 1H 2015 Results – UK Exit, Stage Left – DFA Research Alert

NAB today announced their results for 1H 2015, which completes the updates from the major banks this week. Somewhat similar themes, with volumes up but lending margins down, offset by some deposit repricing and lower provisions. The hand of the regulator can be seen on the Australian home loan business, but significantly NAB outlined an exit path from the UK requiring capital, and other strategic initiatives, and a rights issue. No commentary on the potential demands by higher regulatory capital.

On a statutory basis, net profit attributable to owners of the Company was $3.44 billion, an increase of $584 million or 20.4% compared with March 2014. Cash earnings were $3.32 billion, an increase of $170 million or 5.4% with improved performances across all major businesses. This was in line with expectations. Excluding prior period UK conduct related charges, cash earnings rose 0.3%. Analysis of the results shows a trade off between volume growth and margin.

Revenue increased 3.1%. Excluding gains on the UK Commercial Real Estate (CRE) loan portfolio sale and SGA asset sales, revenue rose 2.2% benefitting from higher lending balances, the impact of changes in foreign exchange rates, stronger Markets and Treasury income and increased NAB Wealth net income. Group net interest margin (NIM) declined 2 basis points over the year and 1 basis point when compared to the September 2014 half year.

Expenses were broadly flat but excluding a fine paid in relation to UK conduct and prior period UK conduct related charges rose 4.0%. The increase mainly reflects the impact of changes in foreign exchange rates, investment in the Group’s priority customer segments and higher technology costs, combined with occupancy and Enterprise Bargaining wage increases.

Improved asset quality resulted in a total charge to provide for bad and doubtful debts (B&DDs) of $455 million, down 13.8%. This primarily reflects lower charges in UK Banking and NAB UK CRE. Compared to the September 2014 half year, the B&DD charge rose 30.4% due to releases from the Group economic cycle adjustment and NAB UK CRE overlay of $104 million in the prior period which were not repeated. Group asset quality metrics continued to improve over the period. The ratio of Group 90+ days past due and gross impaired assets to gross loans and acceptances of 0.85% at 31 March 2015 was 34 basis points lower compared to 30 September 2014 and 67 basis points lower compared to
31 March 2014.

The Group’s Basel III Common Equity Tier 1 (CET1) ratio was 8.87% as at 31 March 2015, an increase of 24 basis points from September 2014. As previously announced, the Group’s CET1 target ratio from 1 January 2016 remains between 8.75% – 9.25%, based on current regulatory requirements. The interim dividend is 99 cents per share (cps) fully franked, unchanged from the prior interim dividend, and below market expectations.

For the March 2015 half year the Group has raised approximately $17.3 billion of term wholesale funding. The weighted average term to maturity of the funds raised by the Group for the March 2015 half year was approximately 5.0 years.

The Group’s quarterly average liquidity coverage ratio as at 31 March 2015 was 118%. The ratio of collective provision to credit risk weighted assets was 1.01% at 31 March 2015 compared to 0.83% at 30 September 2014 with the increase over the period reflecting transition to AASB. The ratio of specific provisions to impaired assets was 35.5% at 31 March 2015, which compares to 35.3% at 30 September 2014 and 34.8% at 31 March 2014.

There were two significant strategic announcements in the results.

UK Exit – this was signalled in October 2014 as a result of the strategy to focus on the Australian and New Zealand franchise. Significant work has since been undertaken on various exit options, in particular public market options which offer increased certainty on the ability to transact and timing. While remaining open to a trade sale, NAB intends to pursue a public market option of a demerger of approximately 70-80% of Clydesdale Bank’s holding company National Australia Group Europe Ltd and its subsidiaries (Listco) to NAB shareholders and a sale of the balance by way of IPO (approximately 20-30%) to institutional investors. A demerger accelerates the full exit of the UK business, as opposed to a prolonged multi-staged public market sell-down, and allows an exit to be targeted by the end of this calendar year, subject to market conditions. The consequences for NAB will be a reduction in cash earnings on separation of Listco with shares in Listco to be received by NAB shareholders, whilst NAB cash ROE should increase on separation; the transaction expected to have a broadly neutral impact on NAB’s capital position excluding the capital support to Listco which will receive capital support of £1.7bn is, from separation, expected to be a full deduction from NAB CET1. Actual losses lower than £1.7bn should result in a capital release for NAB over time. Post separation, future actual conduct cost will be recognised by NAB within discontinued operations outside of cash earnings with no impact on capital (netted against £1.7bn support). No impact on NAB’s credit ratings expected

NAB Wealth today announced it has received APRA approval for its life insurance arm to enter into a reinsurance arrangement with a major global reinsurer for approximately 21% of its in-force retail advised insurance book. The transaction is expected to release approximately $500 million of CET1 capital (13 basis points) to the NAB Group, and represents approximately 15% of NAB Wealth’s life insurance embedded value. This is expected to result in a reduction in NAB Wealth cash earnings of approximately $25 million per annum.

Also, NAB will be undertaking a 2 for 25 fully underwritten pro rata accelerated renounceable rights issue with retail rights trading (the Entitlement Offer) at an offer price of $28.50, to raise approximately $5.5 billion. Approximately 194 million new NAB ordinary shares are to be issued (approximately 8.0% of issued capital). New shares issued under the Entitlement Offer will rank equally with existing shares from the date of allotment. New shares will not however be entitled to the interim dividend for the half year ended 31 March 2015 of 99 cps because they will not be issued before the dividend record date.

Looking at the segmentals, Australian Banking cash earnings were $2,574 million, an increase of 4.0%, with revenue the key driver. Revenue rose 3.9% reflecting a stronger trading performance, combined with higher volumes of housing and business lending, partly offset by weaker margins. Expenses rose 3.8% driven by additional service roles and front line business bankers, combined with Enterprise Bargaining wage increases and higher technology costs. Cost to income rose by 10 basis points to 40.7%. Asset quality metrics continued to improve and B&DD charges of $366 million fell 2.4%, benefitting from lower business impairment activity partly offset by higher collective provision charges including a $49 million overlay for agriculture and resource sectors. NIM declined 3 basis points to 1.60% as a result of asset competition and lending mix impacts.

Although NAB experienced above system growth in mortgages, margins on home lending were squeezed 5 basis points.

Broker volumes grew from 30.2% to 30.9% of loans originated. There was a net 209 increase in brokers across aggregators PLAN, Choice and FAST – currently 3,700 affiliated brokers, and a 31% increase in white label transaction. LVR’s over 80% were circa 20% of transactions, and around 15% of book, with a slight fall above 90%.

Looking at the loan portfolio mix, 28.8% of loans were for investment property (up from 28.2% in Sept 2014), and 35% of loans were interest only. The average balance was $276,000. 90 Day past due was 0.48% and impaired loans 0.14%. The loss rate is 0.03%. Home loan impairment is lower through the broker channels than proprietary channels (opposite to what the regulator says, by the way, but consistent with our own modelling).

Steps are being taken to slow growth in investor mortgage lending to meet APRA’s 10% YoY threshold – currently 13%, and they say they are on track to comply with APRA’s best practice serviceability guidelines by June 2015 – floor rate comfortably above 7.0% and serviceability buffer comfortably above 2.0% (including buffer on existing debt). Interest only lending assessed on a principal and interest basis. This shows the regulator is having an impact and that lending criteria are tightening.

NZ Banking local currency cash earnings rose 4.5% to NZ$418 million with higher revenue given steady growth in lending volumes and improved margins (up 7 basis points, but with a 13 basis fall in lending margin, offset by 10 basis point rise in deposit margin, as well as funding and capital benefits) reflecting lower funding costs and benefits from both higher capital levels and higher earnings on capital. Costs rose 1.8% due mainly to increased personnel expenses, but were broadly flat compared to the September 2014 half year. Cost to income ratio rose 80 basis points to 40.2% B&DD charges were higher over the period with lower collective provision write-backs, but were flat over the six months to 31 March 2015 given the continued benign credit environment.

NAB Wealth cash earnings increased 28.2% to $223 million reflecting improved results from both the investments and insurance businesses, and lower operating expenses. Net income rose 8.0% due to improved insurance claims performance, stable lapses and growth in funds under management (FUM) as a result of strong investment markets, partly offset by lower investment margins related to a change in business mix. Cost to income ratio fell by 7.7% to 67.9%. There was no repeat of the insurance reserve increases seen in prior periods.

UK Banking local currency cash earnings grew 35.6% to £99 million driven by a further material reduction in B&DD charges as the business benefitted from improved economic conditions and loan portfolio shifts. Revenue was slightly weaker despite good growth in home lending volumes with competitive pressures resulting in NIM decline of 11 basis points from lending, points. Costs fell 1.2% (cost to income up 10 basis points to 70.3%) with increased restructuring and marketing spend more than offset by a one-off pension scheme gain in the March 2015 half year and conduct related charges that were incurred only in the March 2014 half year.

NAB Financial Advisors Under The Microscope

According to the Sydney Morning Herald,

“The National Australia Bank has quietly paid millions of dollars in compensation to hundreds of clients given what it considers inappropriate financial planning advice since 2009.

The bank is the latest institution to face disturbing revelations of misconduct in its financial planning division, with a Fairfax Media investigation uncovering instances of forgery, “rogue advisers” and multiple sackings inside its financial advice arm.

A cache of confidential internal documents obtained by Fairfax Media reveals that, according to NAB, 31 of its financial planners were terminated, suspended or had their resignations “ensured” due to conflicts of interest, inappropriate advice, inappropriate practices or repeated compliance breaches

Disturbingly, the document states that these instances were not detected by the bank’s internal controls, but through client complaints or queries by authorities”.

This is further evidence that the financial advice sector is not up to scratch, and that despite the FOFA reforms (which has been subject to various government attempted revisions) we think that there is still room for significant improvement in the regulatory framework, practice and culture relating to providing good financial advice in Australia, with a focus on doing the right thing for clients. The claim that “its just a few bad apples” becomes less credible as more organisations are implicated. Both ASIC and the recent FSI report highlighted significant structural problems. Remember the superannuation balances of Australians now stand at more than $1.93 trillion.

We think that the concept of general advice should be removed, and advisors should not be able to receive any indirect financial benefit from the advice they provide. Separately, financial products can be sold, provided all relevant facts, and costs are disclosed. The two – advice and product sales, should be separated completely. You can read my earlier discussions here.

NAB 2015 First Quarter Trading Update

NAB released its trading update today. Overall cash profit was a little below expectations, and loss provisions were up. Looking in more detail, revenue rose approximately 4%, but after excluding gains on the UK Commercial Real Estate (CRE) loan portfolio sale and SGA asset sales, on a like for like basis, increased approximately 2% thanks to higher markets income and growth in lending balances over the quarter. Group net interest margin (NIM) was flat, but after excluding Markets and Treasury, was slightly lower. Expenses increased approximately 4% after excluding specified items in the September 2014 Half Year. The main drivers include timing of enterprise bargain agreement-related salary increases, normalisation of performance based incentives and investment in the core franchise. The charge for Bad and Doubtful Debts for the quarter rose 30% to $227 million, but was stable excluding releases from the Group Economic Cycle Adjustment (ECA) and UK CRE overlay in the September 2014 Half Year.

The Australian business appears to be settling now, with business banking losses easing despite intense competition. Mortgage lending is still strong. No further comments were made on the UK exit strategy. The Group’s Basel III Common Equity Tier 1 (CET1) ratio was 8.74% as at 31 December 2014, an increase of 11 basis points from 30 September 2014. As previously announced, the Group will target a CET1 ratio of 8.75% – 9.25% from 1 January 2016, based on current regulatory requirements.

National Australia Bank CRE Sale

National Australia Bank (NAB) is to sell an additional £1.2 billion parcel of higher risk loans from its UK Commercial Real Estate (CRE) portfolio to an affiliate of Cerberus Global Investors (Cerberus). As a result of the sale, a small gain is expected to be recognised in the March 2015 half year accounts, and an estimated £127 million of capital will be released for the NAB Group when the transaction is settled. Following the sale, the balance of the portfolio will be reduced to £836 million, compared to the original balance of £5.6 billion in October 2012 when the run-off portfolio was first established. The loans being sold are mainly defaulted, watch and high loan-to-value loans, with the sale reducing the higher risk loans in the portfolio by 93%.

NAB Group Chief Executive Andrew Thorburn said NAB had accelerated the run-off of theNAB UK CRE portfolio, with the great majority of the remaining non-performing loans being sold. “This is an important step forward, effectively bringing closure to one of our legacy positions. The sale of these higher risk loans in the NAB UK CRE portfolio is another important milestone in our strategy of reducing our low returning legacy assets and sharpening our focus on our core Australian and New Zealand franchises,” Mr Thorburn said. “Pleasingly the remaining NAB UK CRE loans are largely strong performing loans, and we will look at other options to manage this small remaining portfolio.”

NAB and Cerberus will work together on a smooth transition for impacted customers. This work will include appropriate advance notice to enable customers to understand and plan for the transfer. Given the significant risk reduction in the portfolio over the last 2 years, the NAB UK CRE business segment will no longer be reported as a separate line of business in the NAB accounts and going forward will be reported as part of Corporate Functions and Other. The NAB UK CRE collective provision overlay will be separately assessed as part of the usual half year accounts close process, including the requirements of AASB9. The transaction is not subject to regulatory or other external approvals, and the assets will immediately be derecognised from the NAB Group’s balance sheet.

Nab’s Long Winding Road Home

Nab released full year results to September 2014 today. From the ASX announcement we see:

Cash earnings declined to $5.18 billion, which is 9.8% below the September 2013 full year due to earnings adjustments announced on 9 October 2014 relating to UK conduct provisions, capitalised software impairment, deferred tax asset provisions and R&D tax policy change totalling $1.5 billion after tax for the 30 September 2014 full year.

Excluding the impact of changes in foreign exchange rates, actual revenue declined 1.1%. After exchange rate adjustments, revenue increased by approximately 1.9% with higher lending balances, partly offset by a lower net interest margin (NIM) and weaker Markets and Treasury income.

Expenses rose 0.7 % excluding the impact of changes in foreign exchange rates and one-off adjustments. Adding in the impact of higher UK conduct provisions, capitalised software impairment and R&D tax policy change expenses rose 21%. Excluding these items and prior period UK conduct charges relating to PPI and IRHP, expenses rose 4.5% over the year.

Improved asset quality and deliberate portfolio choices made over recent years have resulted in a total charge to provide for bad and doubtful debts (B&DDs) for the year of $877 million, down 54.7% on 30 September 2013 due primarily to lower charges in Australian Banking and NAB UK CRE (Corporate Real Estate). The charge includes a $50 million release from the Group economic cycle adjustment and $99 million release from the NAB UK CRE overlay

The Group maintains a well diversified funding profile and has raised approximately $28.2 billion of term wholesale funding (including $7 billion secured funding) in the 2014 financial year. The weighted average term to maturity of the funds raised by the Group over the 2014 financial year was 5.1 years. The stable funding index was 90.4% at 30 September 2014, a 1.2 percentage point increase on 30 September 2013.

The Group’s Basel III Common Equity Tier 1 (CET1) ratio was 8.63 % as at 30 September 2014, an increase of 20 basis points from 30 September 2013 and broadly stable compared to 31 March 2014. As announced in the March 2014 half year results, the Group will target a CET1 ratio of 8.75% – 9.25% from 1 January 2016, based on current regulatory requirements.

The final dividend has been maintained at 99 cents, fully franked, and a dividend reinvestment plan (DRP) discount of 1.5% will be offered with no participation limit. NAB has entered into an agreement to have the DRP on the final dividend partially underwritten to an amount of $800 million over and above the expected participation in the DRP. Assuming a DRP participation rate of 35%, these initiatives will provide an expected increase in share capital of approximately $1.6 billion, which is equivalent to a 44 basis point increase in NAB’s CET1 ratio.

DFA believes the challenge for the bank is to get their Australian franchise to fire consistently, leveraging their footprint in home lending, business banking and wealth management. This will be a long and hard journey because it will be a question of excellence in execution, effective customer segmentation, and the removal of toxic customer servicing experiences, enabled by continued technology investment. We would also expect to see a continued withdrawal from the overseas ventures, which consistently underperformed. Overall, we believe NAB will become ever more reliant on the local Australian and New Zealand businesses, and that the long winding road of offshore investments will lead to further divestments. The truth is that the big four have a natural advantage in their home markets (high margins, benign competition and gentle regulation) and Australian banks find it very hard to perform consistently in the high-competition markets of the UK and USA. But Nab will have to work hard to break the cultural, process and systems barriers which beset the bank.

Finally, a release in provisions made a significant positive contribution this time around, but will not always be available.

Chart source ASX.