National Australia Bank Anticipates Slower Earnings And Asset Growth In FY2024

National Australia Bank (NAB or the Group) is Australia’s largest business bank and second largest bank by market capitalisation, with more than 38,000 employees and 643 branches and business centres in Australia and New Zealand. NAB was established in 1858 and is based in Melbourne.

Business banking strong; pressure building in home lean market

NAB has posted an 8.8 percent lift in cash earnings to $7.7 billion for the financial year ended 30 September 2023 and a 10 percent lift in the full-year dividend to $1.67 fully franked. Basic earnings per share were $2.47, up from $2.21 in the previous financial year.

Net operating income was up 13 percent at $20.6 billion, however operating costs were 9.1 percent higher. The result reflects a 12.9 percent cash return on equity (ROE), which highlights the continuing high profit levels enjoyed by Australia’s banking sector. This return follows a 11.7 percent ROE in FY2022 and a 10.7 percent ROE in FY2021.

NAB’s net interest margin was up 10 basis points in the first half-year to 1.77 percent, before declining 6 basis points to 1.71 percent in the second half-year. This is despite the higher level of interest rates which generally are supportive of higher interest margins in the Australian banking system.

Gross Loans and Acceptances at 30 September 2023 stood at $708.5 billion and customer deposits at $587.4 billion, compared to $687 billion and $566 billion respectively at 30 September 2022.

The bank’s capital ratio remains prudentially sound at 12.2 percent, which is comfortably above NAB’s target range of 11 to 11.5 percent. This capital ratio falls to 11.94 percent when adjusted for the impact of the remaining $1.2 billion share buyback.

A final fully franked dividend of 84 cents per share will be paid on 15 December 2023, representing a payout ratio of 67.7 percent, which is at the lower end of the Bank’s payout ratio target of 65 to 75 percent of cash earnings. The current payout ratio reflects NAB’s caution going into the 2024 financial year.

Slower second half-year in 2023, a more challenging environment in 2024

The key message that shareholders can take away from the 2023 financial year result is the weaker second half-year earnings performance, when compared with the first half-year. This earnings weakness is anticipated to continue into the 2024 financial year, according to NAB’s CEO, Ross McEwan.

The source of the anticipated softer earnings in FY2024 is the NAB’s Personal Banking division which includes the highly competitive home loan market that is being buffeted by the tide of rising interest rates. The cautionary message from NAB’s CEO is that the full impact of higher residential mortgage interest rates is yet to be felt by Australian households. “Given a number of sector headwinds this year including heightened refinancing activity and competitive pressures, we adopted a disciplined approach to originating new home loans,” Mr McEwan said. The Personal Banking profit result declined by 9 percent to $1.45 million on a year-on-year comparison, but significantly the second half-year result was down 16 percent compared to the first half-year of FY2023. The NAB CEO’s comments imply that this downward earnings trend is set to continue into the 2024 financial year, given his additional observation that NAB’s residential mortgage asset quality is deteriorating.

The main earnings driver for NAB is the Business and Private Banking division which accounts for about 40 percent of the bank’s earnings. This division performed strongly in 2023, with earnings coming in at $3.32 billion, an increase of 10 percent on the previous financial year result. However, second half-year earnings from this division were down 6.4 percent compared to the first half-year outcome.

Corporate and Institutional Banking performed well at $1.9 billion for the 2023 financial year, up 15 percent, with the second half-year down a modest 1 percent compared to the first half-year.

The New Zealand Banking division recorded an 8.5 percent profit lift in the 2023 financial year, to NZ$1.5 billion, although the second half-year was down15 percent compared to the first half-year.

Outlook

NAB’s FY2024 earnings outlook is uncertain given the challenges in the home loan market and slowing home loan growth. According to the NAB CEO, the bank took the “deliberate decision to slow down growth of home lending where returns have been challenged”. The bank has disclosed that there are some signs of home loan credit quality deteriorating. Ninety-day arrears and gross impaired assets increased nine basis points to 0.75 per cent in the second half-year, with the key drivers “higher delinquencies across the Group’s home loan and business lending portfolios”, according to the CEO.

NAB remains the leading business bank in Australia, and lending in this segment was up 8 per cent year-on-year to 30 September 2023 and earnings were up 10 per cent to $3.3 billion. This was the highlight of NAB’s 2023 financial year results.

CEO Ross McEwan neatly summed up the strategic dilemma facing NAB when he said at the results announcement, “It is not that we are abandoning the mortgage market or our personal bank, but if you were biasing one way or the other, you would put additional capital in a business bank, and that is what we have been doing”.

Provided the Australian economy remains resilient throughout the 2024 financial year, NAB shareholders may see just a temporary earnings dip, however the bank is well capitalised and is likely to continue delivering consistent shareholder returns over the medium term.