National Australia Bank (ASX: NAB) is one of the largest publicly listed banks in Australia. NAB has a market capitalisation of A$47 billion.

What are the HY20 result?

NAB reported cash earnings of $2,471 million excluding large notable items of $1,035 million. This represents a fall of 24.6% compared with HY19. This result was driven by higher credit impairment charges and mark-to-market losses on NAB’s quality liquids portfolio within Markets and Treasury.

Net Interest Margin declined 1 basis point to 1.78%, but was flat excluding Markets and Treasury. This reflects repricing in the home lending portfolio offset by a lower earnings rate on deposits and capital given the impact of a low interest rate environment, combined with competitive pressures. Underlying expenses increased 1.6% with higher investment spend and restructuring-related costs partly offset by productivity benefits and lower performance-based compensation.

Credit impairment charges rose by 158.6% to $1,161 million, and as a percentage of gross loans and acceptances rose 23bps to 38bps. HY20 charges include $828 million of additional collective provision forward looking adjustments, of which $807 million is a top-up to the economic adjustment to reflect potential COVID-19 impacts.

The large notable items were previously announced on 20 April 2020. They include a net increase in provisions for customer-related remediation matters of $188 million after tax, a change to the application of the software capitalisation policy which will reduce NAB’s earnings by $742 million after tax and an impairment of the carrying value of NAB’s investment in MLC Life of $214 million (after tax). Consequently, NAB reported cash earnings including notable items of $1,436 million, which is down 51.4% compared with HY19.

The dividend payment for HY20 is 30 cents per share (fully franked). This represents a dividend payout ratio of 61% and compares with 83 cents per share (fully franked) for HY19. The dividend payout of 61% is the lowest payout ratio for a very long time and is consistent with APRA’s request for banks and insurance companies to lower dividends in the current highly uncertain economic environment.

What are NAB’s plans to raise additional capital?

NAB also announced today a capital raising comprising a fully underwritten institutional share placement (Placement) of A$3 billion and a non-underwritten Share Purchase Plan, targeting to raise approximately A$500 million. The Placement will be undertaken at a fixed price of A$14.15 per share, which represents an 8.5% discount to NAB’s closing price on 24 April 2020 of A$15.46 per share. The Placement will result in approximately 212 million new shares being issued, which represents 7.1% of NAB’s existing shares on issue.

This capital raising is expected to increase NAB’s Tier 1 capital ratio to 11.2%, compared with 10.39% at 31 March 2020.

NAB’s capital raising and the large reduction in the HY20 dividend reflects the uncertain economic outlook due to the COVID-19 pandemic. NAB’s management considers that these actions will provide NAB with sufficient capacity to support customers through the challenging times ahead and to assist with managing through a scenario of a prolonged and severe economic downturn.

 

What is the outlook?

NAB’s management notes that the measures to contain the spread of COVID-19 have had a sudden and materially negative impact on economic activity. Fiscal and monetary stimulus is expected to cushion the blow to output and employment, but are unlikely to fully offset the downturn in the near term. NAB expects that Australian GDP will decline by 8.4% by the September quarter 2020 compared to December quarter 2019 and not return to pre COVID-19 levels until early 2022, while unemployment is expected to peak at 11.7% in mid-2020 before partially recovering to 7.3% by December 2021. This economic outlook means that the earnings outlook for NAB, as well as the whole banking sector, is highly uncertain. However, this uncertainty is reflected in NAB’s share price which today is at levels not seen since the mid to late 1990s.

What is the market’s reaction?

NAB today is in trading halt due to the capital raising being undertaken. However, ANZ (ASX: ANZ) share price is down 3.3%, Westpac (ASX: WBC) share price is 4.5% and CBA (ASX: CBA) is down 1.1%. In contrast, the broader market is up slightly. This means that the NAB result disappointed the market and has implications for the other banks, with the sharp drop in the NAB dividend payment being higher than expected.


 

Disclaimer:

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April 27, 2020