Two financial stocks which are undergoing major changes are National Australia Bank Ltd. (ASX: NAB) and QBE Insurance Group Ltd (ASX: QBE). Both companies have endured rather challenging periods in recent years but, with changes being made to their business models, they could be on the cusp of improved financial performance.
In NAB's case, its international operations have been a cause for concern for a number of years, with its UK subsidiaries Clydesdale and Yorkshire Bank causing disappointment for NAB's investors. For example, they have been forced to make provisions for the seemingly never-ending payment protection insurance (PPI) claims, which are not yet at a close. As such, NAB's decision to offload the struggling divisions plus its 28.5% stake in US-based Great Western Bank will allow it to focus on core activities and generate improved performance and efficiencies within more favourable product areas.
Furthermore, NAB has strengthened its balance sheet via a capital raising. The bank's common equity tier 1 ratio now stands at just below 10%, which is a 1.07% improvement on a year ago. This should allow it to face the challenging economic circumstances in which the Australian economy finds itself, while NAB's dividend yield of 6.5% (fully franked) will provide the bank's investors with an impressive level of cash flow while the bank seeks to improve its financial performance.
That said, NAB is forecast to increase its bottom line at an annualised rate of almost 9% during the next two years. And, with its shares trading on a price to earnings (P/E) ratio of 13.4 versus 15.9 for the ASX, an upward rerating could be on the cards.
Meanwhile, QBE is also in the process of refreshing its business model, with a number of non-core assets having been sold off as the insurer aims to become a leaner, more focused and more profitable entity. It seems to be making encouraging progress on this front, with its bottom line expected to rise by 58% over the next two financial years. And, as with NAB, it trades at a discount to the ASX, with QBE having a P/E ratio of 15.3.
A key part of QBE's growth plans is to improve its penetration in emerging markets, as well as provide an improved multi-channel distribution approach in Australia and New Zealand. Furthermore, with QBE being on target to post a total run rate of savings of $450m by the end of the 2016 financial year, its margins are likely to improve over the coming years, too.
Clearly, the market is backing QBE's turnaround plan, with the company's shares having bucked the wider trend to rise by 17% since the turn of the year. And, with a beta of less than 0.6, QBE offers relative stability even during a period of change for the business. Therefore, alongside NAB, it appears to be a strong buy right now.
