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Tuesday 30 July 2013 by Legacy

NAB Group credit review - retail

Executive Summary

National Australia Bank Limited (NAB) is the third-largest bank in Australia in terms of total deposits, loans and resident assets
After surviving the banking crisis in Australia in the early 1990s in better shape than its peers, NAB for several years enjoyed a reputation for superior management. However its reputation was tarnished mid-2000s by fraud-related losses and poor investments in the US. During the GFC NAB was hit by losses on asset-backed securities and other high risk assets
NAB's risk profile is well diversified and its asset quality is sound reflecting the strong economics of its domestic markets and its high quality loan portfolio, weighted in well-secured residential mortgages
NAB is less exposed to Australian housing loans and more to business banking when compared to its peers so the health of Australia's mid-market companies is a key issue for NAB
During 1H13 all of NAB’s main business lines reported profit growth underpinned by ongoing cost rationalisation however its profitability still lags that of Australia's other major banks due to the drag from its UK business
For years the unresolved question has been whether to bulk up to a more meaningful presence or exit the UK. NAB’s current plan is to shrink into a niche presence - which involved substantial restructuring costs booked in FY2012
NAB's funding and liquidity is adequate. However similar to other Australian major banks, NAB is structurally reliant on foreign debt
However the Australian authorities have long been broadly supportive of the major banks' financial positions and funding in particular. The central bank is currently in the process of enhancing and broadening its liquidity support facilities
NAB’s capital position is good and has been improving due to profit retention and no loan growth. NAB’s capitalisation is similar to Australia's other major banks with a Basel III core Tier 1 ratio of 8.22% at 1H13
On the back of NABs improving position, management announced an increase in its dividend payout ratio to 75%, up from 71% for 1H12 – a move which is broadly credit neutral given the bank's satisfactory performance and good balance sheet strength
NAB offers numerous fixed income products ranging from term deposits to hybrid securities. Traditionally the subordinated debt offered by National Wealth Management Holdings Ltd and the Tier 1 National Capital Instruments have offered good value for investors comfortable with or wanting NAB group exposure. We remain confident in the bank’s ability to meet its commitments when due

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