National Australia Bank (NAB)

Transcription

1 29 March 2016 Analyst TS Lim Authorisation Chris Savage Recommendation Buy (unchanged) Price $25.62 Target (12 months) $29.50 (unchanged) Expected Return Capital growth 15.1% Dividend yield 7.7% Total expected return 22.8% Company Data & Ratios Enterprise value Market cap n/m $67,746m Issued capital 2,644m Free float 100% Avg. daily val. (52wk) $209.5m 12 month price range $ $37.75 GICS sector Price Performance Banks (1m) (3m) (12m) Price (A$) Absolute (%) Rel market (%) National Australia Bank (NAB) And the rest, as they say, is history Re-rating potential supports current valuation NAB s days as the perennial banking underdog could be over following the successful CYB demerger/ipo. All legacy issues have now been sorted out but the bank has yet to realise its full share price potential. While this is partly due to a range of sector specific noise, we believe this should not be the case as NAB s underlying fundamentals and core ROE outlook have never been stronger. As well, NAB has already undergone the best credit de-risking process since the GFC in our view. Since the 2011 announcement of its UK strategic review, NAB has closely tracked a composite group of peers made up of financials that were previously in need of significant restructuring (AMP, MQG and SUN) up until the end of April It significantly deviated from that track following announcements to raise capital and demerge and IPO CYB in May Having established that NAB s core fundamentals are sound, we attribute its underperformance to risks associated with executing the UK transaction. The latter has been successfully concluded and analysis of peer group restructuring outcomes suggests our current valuation will be well supported (with medium term upside in the $ per share range). $29.50 price target and Buy rating maintained In light of last week s credit quality disclosures by ANZ and WBC, we have taken the opportunity to revise NAB s BDD estimates to more realistic levels. Assuming some exposure to single names and lower Institutional write-backs and recoveries, near term BDD charges as a percentage of GLA are increased by 4-5bp to 19-22bp and outer year charges are increased by 3bp to around 24bp. While this would lead to 2-3% lower cash earnings across the forecast horizon, the $29.50 price target is maintained given the benefit of six months time creep in the DCF and blended valuations. NAB is no longer burdened with legacy issues, having successfully completed its de-risking process with the recent demerger and IPO of CYB. The bank is now well positioned to finally bridge the performance gap with its peers and the Buy rating is maintained. Absolute Price $42 $37 $32 $27 $22 Mar 14 Jul 14 Nov Mar Jul 15 Nov NAB S&P 300 Rebased Earnings Forecast Year end 30 September 2015 (pf) 2016e 2017e 2018e NPAT (reported) (A$m) 6,879 5,370 6,748 7,196 NPAT (adjusted) (A$m) 6,457 6,440 6,688 7,136 EPS (adjusted) (A ps) EPS growth (%) 14% -7% 1% 5% PER (x) P/Book (x) P/NTA (x) Dividend (A ps) Yield (%) 7.7% 7.7% 7.7% 7.7% ROE (%) 14.2% 13.9% 13.7% 13.8% NIM (%) 1.82% 1.81% 1.80% 1.79% Franking (%) 100% 100% 100% 100% SOURCE: IRESS SOURCE: BELL POTTER SECURITIES ESTIMATES BELL POTTER SECURITIES LIMITED ACN AFSL DISCLAIMER AND DISCLOSURES THIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 10 THAT FORM PART OF IT. Page 1

2 And the rest, as they say, is history Re-rating potential supports current valuation Clydesdale s successful demerger and IPO suggest NAB s days as the perennial banking underdog could be over. The bank s legacy issues have been sorted out now but we feel its share price is yet to fully reflect the full upside potential including improved risk/return settings across the business. We revisit AMP s 2003 UK demerger in this note and believe this provides a good indication of where NAB s valuation upside should lie. The catalyst for AMP s share price re-rating was largely the decision to withdraw from the UK and this was despite a $1.7bn capital raising and $1.2bn rights offer (Figure 1). Figure 1 Impact of AMP s UK demerger and IPO Share price $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 Integrates 3 UK brands into AMP UKFS Director retirement (Hewson) Announces next phase of UK restructure Director appointment (Wilcox); MD/CEO appointment (Mohl replaces Batchelor) and senior management restructure; $1bn UK capital support provided by Group AMP de-risking timeline Shareholders approve Australian/UK split into AMP and HHG; director appointment (Yates); organisational change AMP announces intention to withdraw from UK and $1.7bn capital raising Director retirements (Wallis, Cross); director appointments (Handley, Hellicar); Wilcox appointed Chairman AMP $1.2bn rights offer to redeem RPS Director retirements (Bates, Mazoudier, Renard); director appointments (Scheinkestek, Mason) HHG demerged from AMP (AMP stake diluted to 15%); director retirements (Yates, Lord Killearn) reducing Board numbers from 9 to 7 HHG sells 50% stake in Virgin Money $750m capital return from sale of Virgin Money stake $1bn capital returned from sale of HHG stake AMP sells remaining 15% stake in HHG, proposes capital return 2Q01 4Q01 2Q02 4Q02 2Q03 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 SOURCE: BLOOMBERG, COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Figure 2 Impact of NAB s UK demerger and IPO $40 NAB de-risking timeline $35 New CEO appointed Sale of 80% of MLC Life Share price $30 $25 Post GFC: Announces additional $830m CDO provisions Proposes AXA AP acquisition AXA AP acquisition knocked back by ACCC twice, terminated UK bank capital increased, stategic review commenced 5.6bn noncore UK CRE assets transferred to Group $5.5bn capital raising, GWB IPO, UK demerger & IPO proposed, UK CRE runoff completed $20 Capital raising ($3bn and $2.7bn), acquires Aviva UK CRE runoff: 4.4bn (78% of original balance) UK CRE runoff: 3.3bn (59% of original balance) UK CRE runoff: 2.2bn (39% of original balance) UK demerger & IPO complete Ongoing UK conduct costs $15 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 SOURCE: BLOOMBERG, COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Page 2

3 The rerating has yet to crystallise for NAB (Figure 2) and we believe this is due to specific and systemic events that were not present in AMP s time. These include negative sentiment over further higher capital requirements, ensuing uncertainty over dividend sustainability, unfounded housing bubble fears and negative BDD sentiment following ANZ s disclosures last week. NAB s December quarterly update highlighted no issues with capital adequacy (5.4% leverage ratio ahead of APRA s 3-5% range and the best among the majors so far) and asset quality. Although provisions will likely tick up based on some resource-related and corporate exposures, our recent Bank Note$ suggested NAB of the majors has already undergone the best credit de-risking process since the GFC. The share price performances for AMP/HGG were positive two months after the demerger (Figure 3, and likewise the respective market values in Figure 4) and this re-rating would only be expected from NAB/CYB. Figure 3 AMP/HGG pre- and post-demerger $6.00 AMP/HGG at time of demerger $0.30 $5.00 AMP $1.2bn rights offer to redeem RPS AMP rights offer Institutional bookbuild HHG demerged from AMP (AMP stake diluted to 15%) $0.25 $4.00 Closing date for AMP rights offer $0.20 $3.00 AMP announces intention to withdraw from UK and $1.7bn capital raising through Institutional offer and SPP to facilitate demerger AMP shares commence trading on ASX ex-entitlement New AMP shares from rights offer issued Commencement of normal trading for HGG securities on ASX $0.15 $ Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar-04 AMP (LHS) HGG (RHS) $0.10 Figure 4 AMP/HGG combined valuation pre- and post-demerger excluding rights offer 10,000 Value of AMP and HGG pre- and post-demerger 9,000 8,000 ($m) 7,000 6,000 5,000 AMP $1.2bn rights offer to redeem RPS AMP $1.2bn rights offer shares issued, RPS redeemed Commencement of normal trading for HGG securities on ASX AMP announces intention to withdraw from UK and $1.7bn capital raising through Institutional offer and SPP to facilitate demerger 4, Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar-04 AMP HGG Page 3

4 Although early days, Figures 5 and 6 now imply sentiment has finally turned positive for NAB (although not as rapid as we would have liked). Figure 6 further suggests NAB has continued to trail in terms of share price performance when it first announced the UK demerger and IPO. All else being equal and based on inspection, a fair market value at this point should have been around $79bn or close to our $29.50 per share valuation at the minimum. Figure 7 on the next page suggests no benefit has yet been attributed to NAB s successful UK de-risking, with all the majors having had similar share price movements since May Figure 5 NAB/CYB pre- and post-demerger NAB/CYB at time of demerger $36.00 $4.20 $32.00 $4.00 $28.00 $5.5bn capital raising, GWB IPO, UK demerger & IPO proposed, UK CRE runoff completed, UK conduct costs capped Sale of 80% of MLC Life $3.80 $24.00 $3.60 UK demerger & IPO approved by shareholders Commencement of normal trading for CYB securities on ASX $ May Jun Jul Aug Sep Oct Nov Dec Jan Feb-16 NAB (LHS) CYB (RHS) $3.40 Figure 6 NAB/CYB combined valuation pre- and post-demerger excluding rights offer 90,000 Value of NAB and CYB pre- and post-demerger 85,000 80,000 ($m) 75,000 70,000 $5.5bn capital raising, GWB IPO, UK demerger & IPO proposed, UK CRE runoff completed, UK conduct costs capped Sale of 80% of MLC Life 65,000 60, May Jun Jul Aug Sep Oct Nov Dec Jan Feb-16 NAB CYB UK demerger & IPO approved by shareholders Commencement of normal trading for CYB securities on ASX Page 4

5 Figure 7 NAB share price reaction since start of de-risking initiative vs. major bank peers 1.2 NAB relative performance since start of de-risking initiative Share price indexed to start of NAB de-risking initiative May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar-16 NAB ANZ CBA WBC Figure 8 charts NAB s share price progress since the 2011 announcement of its UK strategic review against a composite group made up of financials that were previously in need of significant restructuring (AMP, MQG and SUN). Not surprisingly, NAB closely tracked the composite index until the end of April 2015 when it has underperformed ever since after having raised $5.5bn in capital and proposed the UK demerger and IPO in May 2015 and being caught up in too much noise from negative capital requirement sentiment and uncertainties over dividend sustainability, asset quality and house prices. A better way to gauge NAB s share price potential would be to have the announcement of the UK demerger and IPO as the starting point (Figure 9, next page). This has narrowed the gap expectations and a fair valuation would be around $ per share. We also estimate the medium term upside could be in the $ per share range. Figure 8 Share price reaction since UK strategic review announcement vs. composite 2.4 NAB's tranformation potential post major initiative announcement 1 Share price indexed to start of de-risking initiative Q+1 Q+2 Q+3 Q+4 Q+5 Q+6 Q+7 Q+8 Q+9 Q+10 Q+11 Q+12 Q+13 Q+14 Q+15 Q+16 Q+17 Q+18 Q+19 Composite NAB Page 5

6 Figure 9 Share price reaction since UK demerger/ipo announcement vs. composite 2.4 NAB's tranformation potential post major initiative announcement 2 Share price indexed to start of de-risking initiative Q+1 Q+2 Q+3 Q+4 Q+5 Q+6 Q+7 Q+8 Q+9 Q+10 Q+11 Q+12 Q+13 Q+14 Q+15 Q+16 Q+17 Q+18 Q+19 Composite NAB $29.50 price target and Buy rating maintained In light of last week s credit quality disclosures by ANZ and WBC, we have taken the opportunity to revise NAB s BDD estimates to more realistic levels. Assuming some exposure to single names and lower Institutional write-backs and recoveries, near term BDD charges as a percentage of GLA are increased by 4-5bp to 19-22bp and outer year charges are increased by 3bp to around 24bp. While this would lead to 2-3% lower cash earnings across the forecast horizon, the $29.50 price target is maintained given the benefit of six months time creep in the DCF and blended valuations. NAB is no longer burdened with legacy issues, having successfully completed its de-risking process with the recent demerger and IPO of CYB. The bank is now well positioned to finally bridge the performance gap with its peers and the Buy rating is maintained. Table 1 Estimate changes NAB 2016e 2017e 2018e 2019e Y/e September 30 ($m) Current Previous Change Current Previous Change Current Previous Change Current Previous Change Profit & Loss Net interest income 13,220 13,234 0% 13,884 13,896 0% 14,577 14,591 0% 15,310 15,324 0% Other income 4,763 4,768 0% 5,045 5,049 0% 5,346 5,350 0% 5,669 5,673 0% Total operating income 17,983 18,002 0% 18,929 18,945 0% 19,923 19,941 0% 20,979 20,997 0% Operating expenses -7,637-7,644 0% -7,996-8,002 0% -8,238-8,245 0% -8,534-8,540 0% Impairment expenses -1, % -1,295-1,044-19% -1,414-1,203-15% -1,542-1,320-14% Net profit before income tax 9,313 9,607-3% 9,638 9,899-3% 10,271 10,493-2% 10,903 11,137-2% Corporate tax expense -2,756-2,844 3% -2,849-2,927 3% -3,035-3,101 2% -3,219-3,289 2% Distributions & other n/m n/m n/m n/m NPAT (cash basis) 6,440 6,646-3% 6,688 6,871-3% 7,136 7,291-2% 7,583 7,747-2% DPS (cps) % % % % EPS (cash basis) (cps) % % % % ROE 13.9% 14.3% -0.4% 13.7% 14.0% -0.3% 13.8% 14.0% -0.2% 13.9% 14.0% -0.1% NIM 1.81% 1.81% 0.00% 1.80% 1.80% 0.00% 1.79% 1.79% 0.00% 1.78% 1.78% 0.00% Cost ratio 42% 42% 0% 42% 42% 0% 41% 41% 0% 41% 41% 0% Impairment expense as % of GLA 0.19% 0.14% -0.05% 0.22% 0.18% -0.04% 0.23% 0.20% -0.03% 0.24% 0.21% -0.03% SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Page 6

7 National Australia Bank Company description NAB is a well-diversified financial services organisation providing a comprehensive range of retail and wholesale banking and wealth management products and services. The bank largely operates in Australia (under the NAB and MLC brands) and in New Zealand (under the BNZ brand) and remains a leader in SME/business banking. Investment strategy NAB s turnaround and de-risking phase is largely complete following the demerger and IPO of CYB. The bank is now focused on the lower risk, capital efficient domestic financial services market space. Our investment strategy is predicated upon NAB improving its NIM (through repricing and pricing discipline), maintaining tight cost management and lifting its overall ROE to levels that are closer to those of its major bank peers (i.e. of 14-15%). Valuation Our price target is roughly based on a blend of DCF, sustainable dividend yield play, sustainable ROE and fully de-risked SOP valuation weighted as follows (with a heavier weighting on the former two as the bank de-risks its UK and US operations and normalises its ROE outlook towards 14-15% in the long term). Table 2 NAB SOP valuation Sum-of-Parts (As Is) 2017e NPAT Pros. PE (times) SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Value ($m) Per NAB share Australia Banking 5, ,308 $24.32 UK (as is) $0.00 Wholesale (in Australia Banking) $0.00 Wealth ,962 $1.88 NZ ,361 $3.16 Other including distributions $0.00 Total 6, ,630 $29.36 Table 3 NAB composite valuation Composite Valuation Value ($m) Per NAB share SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Weighting Composite value per NAB share DCF 75,723 $ % $11.45 Dividend yield (sustainable) 80,345 $ % $12.15 ROE (sustainable) 76,220 $ % $2.88 Sum-of-Parts 77,630 $ % $2.94 Total $29.43 SWOT analysis Strengths 1. Agribusiness and SME / commercial banking capabilities; 2. Highest proportion of investment grade exposures in the sector; 3. Lowest exposure to mining and energy; 4. High quality mortgage loan book; 5. Well diversified geographically; 6. Management execution; and 7. Cost discipline and ROE focus. Weaknesses 1. NIM still soft in business lending; and 2. Market share loss in SME/business banking segments. Page 7

8 Opportunities 1. Further domestic banking and wealth management opportunities based on securing alternate distribution strategies; and 2. Driving the Personal and Business Banking cost ratio to below 35%. Threats 1. Macroeconomic factors, e.g. unemployment and slowing credit growth; 2. Changes in regulatory environment, especially higher liquidity/capital/funding constraints under proposed global regulatory reforms, and the potential capping of funds management and advice fees that would crimp wealth management earnings growth; and 3. Increased competition specifically from the majors and disruptors on the domestic front in retail and wholesale banking and wealth management. Sensitivities Table 4 NAB sensitivities Y/e September e 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e Sensitivities Group NIM +10bp NPAT upside (cash basis) 8.0% 8.1% 8.0% 7.9% 8.0% 8.0% 8.0% 8.1% 8.1% - Price target upside $2.35 $2.39 $2.36 $2.34 $2.35 $2.36 $2.37 $2.38 $2.39 Group Loans +1% NPAT upside (cash basis) 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% - Price target upside $0.18 $0.18 $0.18 $0.18 $0.18 $0.18 $0.18 $0.18 $0.18 Australian loans +1% NPAT upside (cash basis) 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.7% - Price target upside $0.24 $0.24 $0.23 $0.23 $0.23 $0.22 $0.22 $0.22 $0.22 NZ loans +1% NPAT upside (cash basis) 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% - Price target upside $0.04 $0.04 $0.04 $0.04 $0.04 $0.04 $0.04 $0.04 $0.04 Other income +1% NPAT upside (cash basis) 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.6% - Price target upside $0.15 $0.16 $0.15 $0.15 $0.16 $0.16 $0.16 $0.16 $0.16 BDD +1% NPAT upside (cash basis) -0.1% -0.1% -0.1% -0.1% -0.1% -0.2% -0.2% -0.2% -0.2% - Price target upside -$0.03 -$0.04 -$0.04 -$0.04 -$0.04 -$0.05 -$0.05 -$0.05 -$0.05 Costs +1% NPAT upside (cash basis) -0.8% -0.8% -0.8% -0.8% -0.8% -0.8% -0.8% -0.8% -0.8% - Price target upside -$0.24 -$0.25 -$0.24 -$0.23 -$0.23 -$0.23 -$0.23 -$0.23 -$0.23 SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Page 8

9 National Australia Bank as at 29 March 2016 Recommendation Buy Price $25.62 Target (12 months) $29.50 National Australia Bank (NAB) 29 March 2016 Table 5 Financial summary National Australia Share Price (A$) As at 29-Mar-16 Market Cap (A$M) 67,746 PROFIT AND LOSS VALUATION DATA Y/e September 30 ($m) 2014 (pf) 2015 (pf) 2016e 2017e 2018e Y/e September (pf) 2015 (pf) 2016e 2017e 2018e Net interest income 12,062 12,497 13,220 13,884 14,577 NPAT (cash basis) ($m) 5,401 6,457 6,440 6,688 7,136 Other banking income 3,305 3,422 3,520 3,702 3,895 EPS (statutory basis) (cps) Total banking income 15,367 15,919 16,740 17,586 18,473 - Growth 1% 20% -27% 23% 5% Funds management income 1,082 1,091 1,139 1,230 1,328 EPS (cash basis) (cps) Insurance income Growth -8% 14% -7% 1% 5% Total operating income 16,773 17,486 17,983 18,929 19,923 P / E ratio (times) Operating expenses -7,992-7,448-7,637-7,996-8,238 P / Book ratio (times) Impairment expenses ,033-1,295-1,414 P / NTA ratio (times) Net profit before income tax 8,056 9,289 9,313 9,638 10,271 Net DPS (cps) Corporate tax expense -2,509-2,676-2,756-2,849-3,035 Yield 7.7% 7.7% 7.7% 7.7% 7.7% Minority interests Franking 100% 100% 100% 100% 100% Investment experience Payout (cash basis) 87% 76% 82% 81% 78% Distributions & other NPAT (cash basis) 5,401 6,457 6,440 6,688 7,136 CAPITAL ADEQUACY Adjustments , Y/e September (pf) 2015 (pf) 2016e 2017e 2018e NPAT (statutory basis, continuing) 5,526 6,879 5,370 6,748 7,196 Risk weighted assets ($m) 367, , , , ,267 Average risk weight 44% 41% 46% 46% 46% CASHFLOW Tier 1 ratio 10.8% 12.1% 11.5% 11.6% 11.7% Y/e September 30 ($m) 2014 (pf) 2015 (pf) 2016e 2017e 2018e Core Tier 1 ratio 8.6% 9.8% 9.6% 9.8% 10.0% NPAT (cash basis) 5,401 6,457 6,440 6,688 7,136 Total capital ratio 12.2% 13.6% 12.8% 12.9% 12.9% Equity ratio 5.4% 5.7% 5.6% 5.7% 5.7% Increase in loans -16,542-36,721-26,108-26,754-28,507 Increase in other assets -51,483 28,689-6,813-19,082-20,540 DIVISIONAL Capital expenditure Y/e September 30 ($m) 2014 (pf) 2015 (pf) 2016e 2017e 2018e Investing cashflow -67,984-7,584-32,966-45,883-49,096 Australian Banking Net interest income 10,277 10,727 11,433 12,045 12,680 Increase in deposits & borrowings -19,856 23,369 25,048 27,252 29,447 Other income 2,640 2,681 2,665 2,828 3,002 Increase in other liabilities 91,755-28,382 6,303 15,758 16,411 Total banking income 12,917 13,408 14,098 14,874 15,682 Equity raised 436 6,271 1,388 1,428 1,456 Operating expenses -5,267-5,558-5,711-6,060-6,431 Other -4,384-9,739-6,212-5,244-5,355 Impairment expenses ,158-1,272 Financing cashflow 67,951-8,481 26,527 39,195 41,960 Net profit before tax 6,909 7,185 7,527 7,656 7,979 Corporate tax expense -1,962-2,074-2,258-2,297-2,394 Net change in cash 5,368-9, NPAT (cash basis) 4,947 5,111 5,269 5,359 5,585 Cash at end of period 41,034 31,426 31,426 31,426 31,426 Home loans 249, , , , ,585 Other loans 174, , , , ,366 BALANCE SHEET Deposits 299, , , , ,877 Y/e September 30 ($m) 2014 (pf) 2015 (pf) 2016e 2017e 2018e Cash and liquid assets 41,034 31,426 31,426 31,426 31,426 UK Banking Divisional gross loans 481, , , , ,841 Net interest income Provisions -3,118-3,520-3,983-4,193-4,417 Other income Other gross loans / inter div. -19,817-22,392-24,489-25,330-26,171 Total banking income Other IEA 276, , , , ,629 Operating expenses Intangibles 7,720 6,774 6,774 6,774 6,774 Impairment expenses PP&E 1,952 1,504 1,549 1,596 1,645 Net profit before tax Insurance assets 85,032 89,350 80,000 81,600 83,232 Corporate tax expense Other assets 12,431 58,318 58,318 58,318 58,318 NPAT (cash basis) Total assets 883, , , ,180 1,008,276 Home loans Other loans Divisional deposits 338, , , , ,776 Deposits Other borrowings 393, , , , ,792 Other liabilities 102, , , , ,031 NAB Wealth Total liabilities 835, , , , ,600 Wealth management income 1,082 1,091 1,139 1,230 1,328 Insurance income Ordinary share capital 24,049 31,334 32,722 34,150 35,607 Total operating income 1,406 1,567 1,244 1,343 1,450 Other equity instruments 4,331 3,317 3,317 3,317 3,317 Wealth management expense Reserves ,662-5,662-5,662-5,662 Other expenses Retained profits 20,377 20,943 21,171 22,615 24,396 Net profit before tax Minority interests Corporate tax expense Total shareholders' equity 47,908 49,951 51,567 54,439 57,676 Investment experience NPAT (cash basis) Total sh. equity & liabs. 883, , , ,180 1,008,276 FUA 158, , , , ,350 WANOS - statutory (m) 2,330 2,439 2,614 2,691 2,747 NZ Banking WANOS - cash (m) 2,387 2,498 2,676 2,753 2,809 Net interest income 1,382 1,504 1,549 1,601 1,659 Other income PROFITABILITY RATIOS Total operating income 1,831 1,938 2,007 2,078 2,157 Y/e September (pf) 2015 (pf) 2016e 2017e 2018e Operating expenses Return on assets 0.6% 0.7% 0.7% 0.7% 0.7% Impairment expenses Return on equity 12.4% 14.2% 13.9% 13.7% 13.8% Net profit before tax 1,014 1,048 1,064 1,161 1,214 Leverage ratio 4.5% 4.8% 5.1% 5.2% 5.2% Corporate tax expense Net interest margin 1.88% 1.82% 1.81% 1.80% 1.79% Minority interests Cost / income ratio 48% 43% 42% 42% 41% Investment experience Cost / average assets 0.92% 0.81% 0.85% 0.84% 0.83% NPAT (cash basis) Growth in operating income -9% 4% 3% 5% 5% Loans 57,368 61,909 64,037 66,240 68,890 Growth in operating expenses -5% -7% 3% 5% 3% Deposits 39,463 41,619 43,259 45,397 47,899 Jaws -5% 11% n/m 1% 2% Other IBL Effective tax rate 31% 29% 30% 30% 30% ASSET QUALITY Y/e September (pf) 2015 (pf) 2016e 2017e 2018e Impairment expense / GLA 0.15% 0.14% 0.19% 0.22% 0.23% Impairment expense / RWA 0.20% 0.21% 0.26% 0.30% 0.32% Total provisions ($m) 3,118 3,520 3,983 4,193 4,417 Total provisions / RWA 0.85% 1.00% 0.99% 0.99% 0.99% Indiv ass prov / gross imp assets 33% 31% 31% 31% 31% IBL / IEA 100% 105% 103% 102% 102% Total provisions + GRCL / RWA 1.00% 0.99% 0.99% 0.99% 0.99% SOURCE: BELL POTTER SECURITIES ESTIMATES Page 9

10 Recommendation structure Buy: Expect >15% total return on a 12 month view. For stocks regarded as Speculative a return of >30% is expected. Research Team Staff Member TS Lim Sam Haddad John O Shea Title/Sector Head of Research Phone tslim shaddad joshea Hold: Expect total return between -5% Chris Savage csavage and 15% on a 12 month view Jonathan Snape jsnape Sell: Expect <-5% total return on a 12 month view Sam Byrnes John Hester Tanushree Jain Healthcare Healthcare/Biotech sbyrnes jhester tnjain Speculative Investments are either start-up enterprises with nil or only prospective operations or recently commenced operations with only forecast cash flows, or companies that have commenced operations or have been in operation for some time but have only forecast cash flows and/or a stressed balance sheet. Such investments may carry an Financials TS Lim Lafitani Sotiriou Resources Peter Arden David Coates Quantitative Tim Piper Hamish Murray Banks/Regionals Diversified Resources Resources Associate Analyst Associate Analyst tslim lsotiriou parden dcoates tpiper hmurray exceptionally high level of capital risk and volatility of returns. Bell Potter Securities Limited ACN Level 38, Aurora Place 88 Phillip Street, Sydney 2000 Telephone The following may affect your legal rights. Important Disclaimer: This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. In Hong Kong this research is being distributed by Bell Potter Securities (HK) Limited which is licensed and regulated by the Securities and Futures Commission, Hong Kong. This is general investment advice only and does not constitute personal advice to any person. Because this document has been prepared without consideration of any specific client s financial situation, particular needs and investment objectives ( relevant personal circumstances ), a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the representative of such licensee, who has provided you with this report by arraignment with Bell Potter Securities Limited) should be made aware of your relevant personal circumstances and consulted before any investment decision is made on the basis of this document. While this document is based on information from sources which are considered reliable, Bell Potter Securities Limited has not verified independently the information contained in the document and Bell Potter Securities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility for updating any advice, views opinions, or recommendations contained in this document or for correcting any error or omission which may become apparent after the document has been issued. Except insofar as liability under any statute cannot be excluded. Bell Potter Securities Limited and its directors, employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Disclosure of interest: Bell Potter Securities Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting and management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests in the securities referred to in this document. ANALYST CERTIFICATION Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to Bell Potter, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. Page 10