The devil is in the detail for National Australia Bank
City Index October 31, 2012 2:24 AM
<p>The full year result and dividend were effectively pre-released earlier this month when NAB bumped up its provisioning levels. The market was already expecting full […]</p>
The full year result and dividend were effectively pre-released earlier this month when NAB bumped up its provisioning levels. The market was already expecting full year 2012 earnings to be in line with the same period last year when including the higher provisioning charges. But we make a very important point here – excluding higher provisioning is unfair. Bad debt charges are part of doing business and banks should not be forgiven by shareholders for ongoing elevated losses.
While the jury is out on how to treat “one-off” increases in provisioning, our real focus in these numbers is to distinguish between the Australian and UK businesses – the blend of two tends to distort numbers so we want to see exactly what is happening in each market to better form a judgment on where NAB can expect earnings to go in 2013. Our initial impressions show that the UK saw a doubling of bad debt costs and arrears continue to rise. Things are much worse UK than in Australia.
The details: To put things into perspective, UK bad debt charges doubled through the year to GBP631m. Loans in arrears that haven’t even been written off yet represent around 0.97% of total UK assets compared to 0.57% in the same period last year. Even if we assume the arrears trend improves miraculously and no more bad loans emerge, provisioning only covers around 34% of total existing problem loans. Things will get worse financially for NAB UK before they get better.
In stark comparison, the Australian personal banking business, bad debt charges actually declined by almost 20% and arrears are at 0.44% compared to 0.46% last year. Even in the business banking division where you would expect more risk, arrears are at the same level as last year and impaired loans are falling as a proportion of total loans in that business division. Australia is not perfect for NAB but these sets of numbers show it is much better than the UK.
Bottom line: The UK is bearing the brunt of the losses as expected while NAB tries to build a narrative that things are tough in both markets. NAB remains our least preferred Australian bank, purely because of the distortion the UK provides to this business. It tends to trade at an attractive discount, which could tempt one to buy on price, but we note that total shareholder returns when including dividends have only average 3% annually over the past decade. In comparison, CBA, WBC and ANZ have all averaged 12.8%, 12.1% and 9.1% respectively.
The international expansion strategy of ANZ is a lot more appealing and for those looking at a pure play domestic bank, Westpac tends to provide good value. Culture is very important and unfortunately NAB has a history of falling short of expectations. Things could very well turn around in the UK but we see this as clinging to hope. With the fragility expected in markets post the US election, we still think focusing on the other listed domestic peers will provide more visibility.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.