National Australia Bank Ltd. (ASX: NAB) today delivered its highly-anticipated 2015 full year results.
It's been a very busy period for Australia's major banks, but even more so for NAB which announced earlier this year it would divest its troubled UK Bank, Clydesdale Banking Group, and focus on its core assets in Australia and New Zealand.
In the year ended 30 September 2015 (FY15), NAB's cash profit rose 15.5% year-over-year to $5.84 billion thanks to a healthy jump in revenue and improved asset quality. Pleasingly, charges for bad debts fell 5% to $823 million.
"In 2015 we have been focused on delivering against our plan – driving improved performance in our Australian and New Zealand business, investing for growth, delivering significant technology milestones for our customers, building a stronger balance sheet and exiting our legacy and lower returning assets," NAB CEO Andrew Thorburn said.
The group's net interest margin fell 0.3% to 1.87%, cash return on equity was 0.4% higher at 12%, and the cost to income ratio fell 2.3% to 50.8%.
Following its record-breaking $5.5 billion capital raising earlier this year, NAB said its Common Equity Tier 1 (CET1) ratio was 10.2% at 30 September, well ahead of the group's target range of 8.75% to 9.25%. However, APRA – the banking regulator – is expected to increase the CET1 requirements of the major banks over time. NAB appears well placed to deal with any regulatory changes.
As expected, NAB's final dividend was held steady at 99 cents per share, fully franked.
Clydesdale Bank
After years of under-performance and charges for bad debts and conduct-related charges, Mr Thorburn provided an update on the group's divestment of CYBG.
"We are also pleased to confirm the demerger and Initial Public Offering (IPO) of CYBG PLC (CYBG) which is expected to be complete in early February 2016," Mr Thorburn said. "This follows the completion of the Great Western Bank (GWB) sell-down, the finalisation of the life reinsurance transaction, and the sale of most of our UK Commercial Real Estate portfolio."
It is anticipated 75% of CYBG will be attributed to NAB shareholders with the remainder sold to institutions. NAB expects CYBG to be listed on both the London Stock Exchange and ASX. However, the demerger requires shareholder, court and regulatory approval.
Nippon Life deal
NAB also provided an update on its transaction with Japan's Nippon Life. NAB confirmed the recent speculation that it would sell 80% of its Life Insurance business to the Japanese giant for $2.4 billion. Part of a 20-year contract, NAB will enter a distribution agreement to provide insurance products through its owned and aligned distribution networks.
The sale price is equivalent to a price-earnings (P/E) ratio of 19x. "The transaction is expected to result in an indicative loss on sale of approximately $1.1 billion inclusive of transaction and separation costs, based on expected completion life insurance net assets of $3.6 billion including $1.6 billion of allocated goodwill," the bank said.
While one-off costs will be around $440 million, the bank's pro forma FY15 CET1 ratio would increase by 0.5% after the transaction and associated costs.
Outlook
Taking a broader view of the global economy, NAB said markets are likely to continue tracking sideways. "Recent activity and leading indicators provide no evidence that global growth is strengthening," the bank noted. It said credit growth in the Australian market throughout FY15 was accelerating, but "remains modest by historical standards."
Like most banks, NAB added that its performance and outcomes are closely linked to the key markets in which it operates.
Buy, Hold or Sell?
Although NAB's profit performance was below many analyst expectations, the group is powering ahead with sweeping changes to improve the bank over the long term. Personally, I think today's results were good. However, I wouldn't buy shares in the bank at this time, since I continue to believe the worst of the banking cycle is yet to come and all bank stocks appear priced to perfection.
