Following-on from the poor results posted by its big bank counterparts Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA) earlier this week, National Australia Bank Ltd (ASX: NAB) today issued its half-yearly report packed full of big announcements.
Whilst the headline profit figures appears promising, especially when compared to the poor results in the prior corresponding period, investors must look beyond this to truly appreciate today's report.
Here are 10 quick takeaways from today's report…
- Cash profits were up 5.4%, or $170 million, year-over-year to $3.32 billion. However excluding prior period UK conduct related charges, cash profits rose just 0.3%. Analysts were expecting cash profits of $3.33 billion.
- On a cash earnings basis, revenue increased 3.1%.
- Diluted cash earnings per share rose 3.7% to 136.1 cents.
- Its Common Equity Tier 1 (CET1) capital ratio was up 0.23% to 8.87%. The bank's target range is for between 8.75% and 9.25% by 1 January 2016, based on current regulations (more than this below).
- An interim dividend of 99 cents per share was declared, the same as last year. Analysts however were expecting 102 cents per share.
- The bank's profitability fell, as expected, as volumes increased. NAB's ever-important net interest margin dropped from 1.94% to 1.92%, whilst gross loans and acceptances jumped 7.4% to $573.5 billion. Home lending grew at 1.3 times system for the half year.
- NAB will demerge and IPO its UK business. See below.
- A 2-for-25 $5.5 billion fully underwritten pro rata accelerated renounceable rights issue will be undertaken. Set at a price of $28.50 per share it'll mean an additional 194 million shares, or 8% of issued capital, will hit the market this year. New shares will not be paid the 99 cents interim dividend.
- After recently receiving approval from APRA for its life insurance arm, NAB Wealth has entered into a reinsurance arrangement with a major global insurer for 21% of its in-force retail advised insurance book. Representing 15% of NAB Wealth's life insurance embedded value the deal will see the business forgo a level of annual cash earnings, but release $500 million of CET1 capital (equivalent to 0.13%).
- Chairman Michael Chaney AO will retire from the role having been in it since 2004, to be succeeded by Dr Ken Henry AC, former Secretary of the Commonwealth Treasury and RBA board member.
Commentary
"Our focus over the March 2015 half year has been on delivering against our strategic priorities outlined in October 2014 – building a stronger Australian and New Zealand franchise and dealing with our low returning and legacy assets," NAB CEO Andrew Thorburn said. "We are encouraged by the progress we have made on both fronts over this period with all major businesses contributing to cash earnings growth."
Mr Thorburn said the bank has made strong progress on removing legacy assets from its balance sheet and continues to focus on its core Australian and New Zealand franchises. This included selling down most of its stake in US-based agribusiness bank, Great Western Bancorp Inc, as well as paying down the UK Commercial Realestate (CRE) portfolio to just GBP600 million.
"While there is still much more to be done, we are clear about our priorities and are focused on what needs to be achieved. We are determined to deliver better outcomes for our shareholders, customers and employees," Mr Thorburn added.
Capital Raising, Demerger and IPO
This is where NAB's half-year report gets a little bit more complex, so stay with me.
Firstly, NAB says its troubled UK assets, which are found in its holding company named National Australia Group Europe Ltd (and its subsidiaries) will be demerged and offloaded through an initial public offering. 'Listco' as it'll be referred to, will enable NAB to divest 70-80% of the holding company, which includes Clydesdale Bank to NAB shareholders – with the remaining 20%-30% sold to institutions.
The company's shares will be listed on the London stock exchange and have CHESS Depository Interests (CDIs) listed on the ASX. Shareholders have the choice of either shares or CDIs.
However, as has been well documented by the financial media, the UK Prudential Regulation Authority said it will require NAB to provide capital support for Listco in the wake of Clydesdale's legacy conduct related issues. This capital support will be capped at GDP1.7 billion, or approximately $3.26 billion at today's exchange rate.
The cap amount will be deduced from NAB's CET1 ratio upon completion of the demerger. NAB believes the cap is "substantially in excess" of its own stress test scenarios, but it said "we believe that the disadvantage of the expected capital deduction is outweighed by the benefits of separating the business."
If losses from legacy issues are lower than the cap amount, they'll be fed back into the CET1 ratio.
The problem for NAB is the expected capital requirements which it and the other banks expect to come into force in the medium term. That's why NAB is undertaking the 2 for 25 fully underwritten pro rata accelerated renounceable rights issue.
Put simply, that means for every 25 shares you hold, you may be eligible to buy two at $28.50 apiece.
The $5.5 billion raised from the issue is estimated to provide a 100 basis point boost to the midpoint of its CET1 ratio target range. To give you an idea of the effect such a large share issuance will have, NAB's pro forma cash earnings per share for the March 2015 half year (i.e. the results it reported today) would be 4.5% lower as a result of the jump in share count.
NAB says it intends to maintain its 99 cents per share fully franked dividend in the September 2015 half year.
Are you worried about your NAB shares?
Personally, I like NAB's new CEO Andrew Thorburn. To me it seems as though he's taking the short-term-pain for a long-term-gain approach to managing NAB. The UK businesses have always been a headache for management. If this capital raise-cum-demerger/IPO goes according to plan, shareholders could be looking at a UK and US free National Australia Bank in 2016.
Whilst risks will always be apparent to any banking outfit and while the cost of the corporate manoeuvre is undoubtedly a big one; I'd be a happier shareholder at the right price after today's announcement.
For the record, though, given the ongoing risks, I believe NAB is not a buy today. In fact, it'd have to drop to well below $25.00 per share before I'd consider buying it for my portfolio. That's because, in addition to the corporate risks above, all the big banks are facing some considerable headwinds.
If you're a big bank shareholder or want to know more about the big banks in general and whether, or not, we think any of them are good buys, you should know we've recently written a free research report on the big banks (see below).
