National Australia Bank (ASX: NAB) is one of the largest publicly listed banks in Australia. NAB has a market capitalisation of A$48 billion.

What did NAB announce today?

NAB today (20 April 2020) announced a $1.1 billion hit to the company’s 1H20 results. This includes the following: a net increase in provisions for customer-related remediation matters of $268 million before tax ($188 million after tax); a change to the application of the software capitalisation policy which will reduce NAB’s capitalised software balance as at 31 March 2020 by $1,056 million and reduce earnings by $742 million after tax; and impairment of the carrying value of NAB’s investment in MLC Life of $214 million (before and after tax).

NAB management notes that the net increase in the provision for remediation of $188 million after tax is expected to reduce the Group’s Common Equity Tier 1 capital (CET1) ratio by approximately 6 basis points. In addition, this remediation comprises both cash earnings changes and increased earnings for discontinued operations.

NAB have decided to change the company’s software capitalisation policy. The change has been to increase the minimum threshold at which software is to be capitalised from $2 million to $5 million. This change is expected to reduce NAB’s 1H20 cash earnings by $742 million after tax.
The final change is regarding MLC Ltd impairment. The challenging operating environment within the life insurance industry has resulted in a decline in the carrying value of NAB’s 20% investment in MLC Life since September 2019. This has resulted in an impairment loss of $214 million (both before and after tax) impacting 1H20 non-cash earnings for continuing operations.

What is the outlook for NAB?

NAB’s mentioned in the announcement today that further details of these results will be shown in NAB’s H120 profit report. This will include information about the impact of the COVID-19 pandemic on NAB’s earnings and balance sheet including provisions, combined with capital and dividend implications.

In short, the short-term outlook for NAB is unfavourable. This is mainly attributed to a slowing in economic activity due to COVID-19. An important point to note is that NAB half yearly dividends are expected to be significantly lower than the last dividend payment of 83 cents per share, based off the current operating environment that the bank is facing.

What is the overall assessment of the Australian banking sector?

Overall, the banking sector faces significant headwinds including the economic impacts of COVID-19, slow credit growth (also reflecting weak economic growth), pressures on net interest margins (which could lower profitability) and increased regulatory requirements (both capital and lending requirements). That is, in the short term at least, the banks may have lower growth prospects than other sectors of the market and there is a significant risk that bank dividend payments could fall over the next year or so.

What is the market reaction?

The market reaction to NAB’s announcement is slightly negative. NAB share price is down 1% and is currently trading at $16.24. This is in addition to NAB’s share price falling around 42% over the last 6-month period. NAB is trading at a forward P/E ratio of around 9x.

 


 

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April 20, 2020