Dissent over NAB's first-quarter result

In a trading update this Monday, National Australia Bank should report a solid profit for the 2017 first quarter but no earnings growth, which will disappoint shareholders convinced that a "stronger simple business with more focus can perform well".

This is how chief executive, Andrew Thorburn, described the lender last year after it got rid of Clydesdale and Yorkshire Bank as well as 80 per cent of its life insurance business.

Shareholders will now expect a stellar performance and according to Morgan Stanley analyst, Richard Wiles, the trading update will highlight NAB's struggle to lift quarterly cash profit much above $1.6 billion, raising the question of whether it can meet or beat the full year consensus estimates of $6.6 billion.

The $1.6 billion quarterly result is broadly in line with the 2016 second-half quarterly average. However, even this $6.6 billion consensus figure for the full year is flattish given that NAB booked $6.48 billion for 2016 on the back of falling margins and higher bad debt charges.

Flat loan losses would be a source of earnings upside, but Wiles thinks investors will focus more on revenue trends this quarter and want to see growth exceeding 3 per cent.

Sadly, on Wiles’ analysis, NAB will likely report only 2 per cent revenue growth, slightly negative "jaws" and steady loan losses. Specifically, he is predicting loan losses of $222 million - or 16 basis points of loans versus 16 basis points and 14 basis points for the third and fourth quarters of 2016 respectively.

'Marginal preference for business banking'

Wiles reckons the bank will report common equity tier one capital ratio of 9.55 per cent following the last dividend payment.

“While the 2016 result was better than we forecast, our view on the outlook has not changed materially. We continue to view the dividend payout ratio as elevated and earnings as vulnerable to loan loss normalisation."

However, the analyst noted that reshaping the business will reduces the potential capital build, which will support Return on Equity.

In contrast, Credit Suisse’s analyst, Jarrod Martin, has picked NAB as his preferred bank because of efforts to steady the business bank and its leadership in driving improved productivity.

“Our major bank order of preference reflects a marginal preference for business banking, in acknowledgement of a degree of on-going regulatory risk associated with consumer banking at this juncture," he said.

Understandably then, Martin’s estimates are higher than the market and he is predicting an interim cash profit of $3.4 billion with full year 2017 cash earnings rising to $6.80 billion.

By extrapolating the interim figures, Martin's 2017 first-quarter cash earnings forecast sits at around $1.5 billion. For its part, CLSA is forecasting $3.29 billion for the half with a final cash profit of $6.72 billion.


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