AUSTRALIA NAB AU Price (at 06:10, 27 Jul 2015 GMT) Outperform A$33.91 Valuation A$ - DCF (WACC 9.6%, beta 1.0, ERP 5.0%, RFR 5.8%) 37.74 12-month target A$ 39.39 12-month TSR % +22.1 Volatility Index Low GICS sector Banks Market cap A$m 89,048 30-day avg turnover A$m 126.9 Number shares on issue m 2,626 Investment fundamentals Year end 30 Sep 2014A 2015E 2016E 2017E Net interest Inc m 13,775 14,410 15,826 16,709 Non interest Inc m 5,138 5,309 5,480 5,660 Underlying profit m 8,733 10,792 11,900 12,799 Reported profit m 5,295 6,977 7,722 8,328 Adjusted profit m 5,184 6,748 7,504 8,110 EPS adj 213.9 267.9 28 300.0 EPS adj growth % -13.5 25.3 4.6 7.1 PER adj x 15.9 12.7 12.1 11.3 PER rel x 1.00 0.76 0.77 0.81 Total DPS 195.2 196.6 201.0 207.0 Total div yield % 5.8 5.8 5.9 6.1 Franking % 100 100 100 100 ROA % 0.6 0.7 0.8 0.8 ROE % 11.0 13.0 13.1 13.3 Equity to assets % 5.4 5.8 5.9 5.9 P/BV x 1.7 1.6 1.5 1.4 NAB AU vs ASX 100, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, July 2015 (all figures in AUD unless noted) 27 July 2015 Macquarie Securities (Australia) Limited Casting a wider net Event NAB have announced that they will they will reprice interest-only mortgages and line of credit facilities by 29bps. NAB s move is broader than the other banks, representing a repricing to c47% of the Australian mortgage book vs the moves at ANZ/CBA (30% of the book). While targeted at investors, the interest-only moves may hit owner-occupiers, leading to some customer attrition. We upgrade our 2016 earnings estimate by 2.9% and maintain Outperform. Impact NAB reprice interest-only mortgages and line of credit facilities by 29bps, adding 3.4% to earnings all else equal Following the announcements from ANZ and CBA last week, NAB have announced that they will they will reprice interest-only mortgages (35% of book) and line of credit facilities (12% of book) by 29bps. All else equal, this will add 3.4% to FY16 earnings. Margins to benefit, whilst reducing RBA's concerns around 'low rate financial stability' - As we have previously discussed in our note Australian Banks - One Stone; Three Birds, repricing mortgages will boost margins (+4bps to Group NIM) and claw back lost RoE from increased capital requirements, whilst slowing investor loan growth from the current 'lofty' levels. This will enable the RBA to take rates lower, which typically leads to sector Outperformance. Further rate cuts the catalyst for additional repricing - Whilst the moves of CBA, ANZ and NAB have been primarily related to investor mortgages, in our view it is likely that additional repricing on the entire mortgage book will coincide with future rate cuts (our economics team expects 1 more rate cut in November, with the risk of a cut in August as well). Move at NAB likely to have some fallout on Owner Occupier Whilst ANZ and CBA repriced all variable investor mortgages, NAB was not afforded the same luxury. We suspect this is due to the same reference rates being used for owner-occupier and investor loans. While the move to reprice interest-only loans is an investor-targeted initiative, it will capture some owner-occupiers in its net. In this sense, there may be some fallout (which NAB will no doubt try and manage), which has led us to temper our earnings upgrades. Earnings and target price revision We upgrade our earnings estimates by ~2.9% and our target price moves from $38.32 to $39.39. Price catalyst 12-month price target: A$39.39 based on a DDM/PE methodology. Catalyst: 3Q15 Trading update August Action and recommendation Maintain Outperform. Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Fig 1 NAB Financial Summary Year Ending 30 September 2017 Outperform PER SHARE DATA Cash EPS (AUD) - Macquarie Basis 251 131 85 216 136 134 270 280 300 Current Price Target Price Cash EPS Growth (%) 5% 3% -35% -14% 60% -2% 25% 4% 7% A$33.91 $39.39 DPS (AUD) 190 99 99 198 99 99 198 201 207 Total Shareholder Return 22.0% BVPS (AUD) 17.89 18.21 18.41 18.41 18.97 19.18 19.18 20.20 21.35 NTA PS (AUD) 14.64 14.88 15.15 15.15 15.65 16.33 16.33 17.14 18.07 Bloomberg: NAB AU Shares on issue (m) 2,349 2,354 2,366 2,366 2,421 2,625 2,625 2,646 2,667 Reuters: NAB.AX VALUATION METRICS Macquarie Equities Australian Banks P/E (Cash) 13.5 12.9 19.9 15.7 12.5 12.7 12.6 12.1 11.3 Analyst(s) Contact(s) P/B (Stated) 1.9 1.9 1.8 1.8 1.8 1.8 1.8 1.7 1.6 Michael Wiblin +61 2 8232 6089 P/NTA 2.3 2.3 2.2 2.2 2.2 2.1 2.1 2.0 1.9 Anita Stanley +61 2 8232 9869 RoE (%) 12.2% 13.6% 8.6% 11.1% 13.7% 12.9% 13.3% 12.9% 13.2% Brendan Carrig +61 2 8237 6043 RoA (%) 0.7% 0.7% 0.5% 0.6% 0.7% 0.7% 0.7% 0.8% 0.8% Chantal Sirisena +61 2 8237 6864 Dividend Yield (%) 5.6% 2.9% 2.9% 5.8% 2.9% 2.9% 5.8% 5.9% 6.1% Dividend Payout (%) 75.8% 75.4% 116.3% 91.5% 72.7% 74.0% 73.4% 71.8% 69.0% Margins & Volumes Sustainable RoE used in Valuation (%) 12.7% 12.7% 12.7% 12.7% 12.7% 12.7% 12.7% 12.7% 12.7% Net Interest Margin (%) GLAA growth (%) Cost of Equity (%) 9.6% 9.6% 9.6% 9.6% 9.6% 9.6% 9.6% 9.6% 9.6% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 4 3 2 1-1 -2-3 Efficiency Cost / Income Ratio (%) Cost growth (%) 2.0% 1.5% 1.0% 0.5% 5 4 3 2 1-1 PROFIT & LOSS (AUDm) Net Interest Income 13,407 6,843 6,932 13,775 7,121 7,289 14,410 15,826 16,709 Non-Interest Income 5,173 2,644 2,494 5,138 2,663 2,646 5,309 5,480 5,660 Fees & Commissions 3,561 1,804 1,848 3,652 1,221 1,261 2,482 2,616 2,673 Financial Markets 769 249 750 999 456 470 926 968 1,007 Life and Funds 1,335 723 717 1,440 781 801 1,582 1,651 1,717 Other Revenue -492-132 -821-953 205 114 319 245 263 Total Operating Income 18,580 9,487 9,426 18,913 9,784 9,935 19,719 21,306 22,369 Total Operating Costs 8,174 4,456 5,724 10,180 4,460 4,467 8,927 9,406 9,570 Employee Costs 4,362 2,292 2,240 4,532 2,329 2,376 4,705 4,319 4,493 Other Costs 3,812 2,164 3,484 5,648 2,131 2,091 4,222 5,087 5,077 Pre-Provision Operating Profit 10,406 5,031 3,702 8,733 5,324 5,468 10,792 11,900 12,799 Impairment Charge 1,934 528 349 877 455 498 953 1,055 1,101 Pre-Tax Profit 8,472 4,503 3,353 7,856 4,869 4,970 9,839 10,845 11,698 Tax Expense 2,337 1,263 1,229 2,492 1,424 1,433 2,857 3,123 3,370 Minority Shareholders -8-3 0-3 -20 0-20 0 0 Other Post Tax Items 675 381-315 66-15 0-15 0 0 Stated Net Profit 5,452 2,856 2,439 5,295 3,440 3,537 6,977 7,722 8,328 Extraordinary & Other Items 675 384-315 69-11 0-11 0 0 Hybrid Distributions -188-90 -90-180 -109-109 -218-218 -218 IoRE/Non Controlling Interest -3 0 0 0 0 0 0 0 0 Derivatives & Hedging Revaluation 0 0 0 0 0 0 0 0 0 Macquarie Cash Profit 5,936 3,150 2,034 5,184 3,320 3,428 6,748 7,504 8,110 160% 150% 140% 130% 120% 110% 100% 90% Asset Quality Impairment Charge / GLAA (bp) Coverage (%) 40 35 30 25 20 BALANCE SHEET & CAP AD (AUDm) Risk Weighted Assets * 362,078 367,224 367,652 367,652 393,238 389,109 389,109 445,901 471,239 Interest Earning Assets 662,028 707,170 715,993 711,582 745,411 757,524 751,468 792,694 840,042 Gross Loans, Advances & Acceptances 521,757 534,172 545,361 545,361 573,490 582,809 582,809 619,565 654,876 Total Deposits 559,238 582,739 599,059 599,059 634,650 644,341 644,341 684,977 724,016 Total Assets 808,427 846,014 883,301 883,301 958,587 969,272 969,272 1,019,073 1,067,562 Shareholders Equity 46,620 47,478 47,908 47,908 49,868 56,415 56,415 59,711 63,418 Tier 1 Capital 37,480 39,774 39,758 39,758 43,752 48,185 48,185 50,567 53,402 Tier 1 Ratio (%) * 10.4% 10.8% 10.8% 10.8% 11.1% 12.4% 12.4% 11.3% 11.3% Core Tier 1 Ratio (%) - Basel III 8.4% 8.6% 8.63% 8.6% 8.9% 1% 1% 9.4% 9.5% 80% 70% 60% 15 10 ASSET QUALITY Impairment Charge / GLAA (bp) 37 20 13 16 16 17 16 17 17 Coverage (%) 63% 68% 76% 76% 146% 144% 144% 140% 134% 25.0 20.0 15.0 10.0 5.0 0.0 5.59 Total Stage 1 DDM Valuation 7.39 Total Fade Period 23.58 Total Perpetuity 1.19 Total Surplus Capital Per Share KEY RATIOS & GROWTH Net Interest Income growth (%) 0.8% 0.6% 1.3% 2.7% 2.7% 2.4% 4.6% 9.8% 5.6% Non-Interest Income growth (%) 5.0% 4.5% -5.7% -0.7% 6.8% -0.6% 3.3% 3.2% 3.3% Total Revenue growth (%) 2.0% 1.7% -0.6% 1.8% 3.8% 1.5% 4.3% 8.0% 5.0% Cost growth (%) 4.4% 6.1% 28.5% 24.5% -22.1% 0.2% -12.3% 5.4% 1.7% Pre-Provision Profit growth (%) % -2.0% -26.4% -16.1% 43.8% 2.7% 23.6% 10.3% 7.6% RWA growth (%) 9.3% 1.4% % 1.5% 7.0% -1.1% 5.8% 14.6% 5.7% GLAA growth (%) 4.2% 2.4% 2.1% 4.5% 5.2% 1.6% 6.9% 6.3% 5.7% Deposit growth (%) 4.9% 2.8% 4.1% 7.1% 3.8% 1.6% 5.4% 6.3% 5.7% Net Interest Margin (%) 2.03% 1.94% 1.94% 1.94% 1.91% 1.92% 1.92% 2.00% 1.99% Cost / Income Ratio (%) 44.0% 47.0% 60.7% 53.8% 45.6% 45.0% 45.3% 44.1% 42.8% *B2.5 2012, B3 2013 onward Source: Company data, Macquarie Research, July 2015 27 July 2015 2
Fundamentals Macquarie Wealth Management Macquarie Quant View The quant model currently holds a neutral view on. The strongest style exposure is Growth, indicating this stock has good historic and/or forecast growth. Growth metrics focus on both top and bottom line items. The weakest style exposure is Profitability, indicating this stock is not efficiently converting its investments to earnings as proxied by ratios such as ROE, ROA et 386/669 Global rank in Banks % of BUY recommendations 41% (7/17) Number of Price Target downgrades 2 Number of Price Target upgrades 4 Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Banks) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. 0.6 0.5 0.5 0.3 0.2 - -3.0-2.0-1.0 0.0 1.0 2.0 3.0-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. -0.5-0.4 - -0.6-1.0-3.0-2.0-1.0 0.0 1.0 2.0 3.0-30% -20% -10% 0% 10% 20% 30% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Dividend Yield FY0 Price to Sales FY0 Dividend Yield LTM Price to Book LTM EBITDA Revisions 3 Month Return on Equity FY1 Return on Equity NTM Profit Margin FY1 Negatives Positives -26% -26% -27% -27% 31% 29% 28% 35% -40% -20% 0% 20% 40% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score 9-0.31-0.07-0.51-7 -0.09-4 2 1.21 0.05-7 Percentile relative to sector(/669) Percentile relative to market(/412) 0 50 100 0 50 100 0 0 1 1 Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 27 July 2015 3
Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 60 100% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 June 2015 AU/NZ Asia RSA USA CA EUR Outperform 46.23% 58.36% 47.27% 44.20% 60.65% 43.01% (for US coverage by MCUSA, 9.68% of stocks followed are investment banking clients) Neutral 37.67% 25.65% 29.09% 49.29% 34.19% 40.93% (for US coverage by MCUSA, 5.53% of stocks followed are investment banking clients) Underperform 16.10% 15.99% 23.64% 6.52% 5.16% 16.06% (for US coverage by MCUSA, 1.38% of stocks followed are investment banking clients) NAB AU vs ASX 100, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, July 2015 12-month target price methodology NAB AU: A$39.39 based on a DDM/PE methodology Company-specific disclosures: NAB AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of 's equity securities. MACQUARIE EQUITIES LIMITED or one of its affiliates managed or co-managed a public offering of securities of Ltd in the past 12 months, for which it received compensation. MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates managed or co-managed a public offering of securities of Ltd in the past 12 months, for which it received compensation. Macquarie Capital (Australia) Limited or one of its affiliates may provide Limited investment advisory services for which it may or may not receive compensation. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. Date Stock Code (BBG code) Recommendation Target Price 25-Jun-2015 NAB AU Outperform A$38.32 10-Mar-2015 NAB AU Outperform A$40.01 05-Feb-2015 NAB AU Outperform A$39.31 14-Jan-2015 NAB AU Outperform A$36.23 30-Oct-2014 NAB AU Neutral A$31.75 22-Oct-2014 NAB AU Neutral A$31.57 01-Oct-2014 NAB AU Neutral A$31.74 25-Sep-2014 NAB AU Neutral A$32.98 16-Sep-2014 NAB AU Neutral A$34.35 02-Jul-2014 NAB AU Neutral A$34.67 17-May-2014 NAB AU Outperform A$37.60 08-May-2014 NAB AU Outperform A$37.78 20-Mar-2014 NAB AU Outperform A$39.85 21-Feb-2014 NAB AU Outperform A$39.02 22-Jan-2014 NAB AU Outperform A$39.86 27 July 2015 4
04-Dec-2013 NAB AU Outperform A$38.07 31-Oct-2013 NAB AU Outperform A$37.36 23-Sep-2013 NAB AU Outperform A$37.18 16-Sep-2013 NAB AU Outperform A$36.54 05-Sep-2013 NAB AU Outperform A$36.17 20-Aug-2013 NAB AU Outperform A$35.56 09-Jul-2013 NAB AU Outperform A$35.01 21-Jun-2013 NAB AU Outperform A$35.23 28-May-2013 NAB AU Outperform A$34.79 09-May-2013 NAB AU Outperform A$34.36 21-Mar-2013 NAB AU Outperform A$32.25 13-Mar-2013 NAB AU Neutral A$30.34 07-Feb-2013 NAB AU Neutral A$27.11 01-Feb-2013 NAB AU Neutral A$26.30 24-Jan-2013 NAB AU Neutral A$25.83 11-Jan-2013 NAB AU Neutral A$25.55 31-Oct-2012 NAB AU Neutral A$25.27 19-Oct-2012 NAB AU Neutral A$26.34 02-Oct-2012 NAB AU Outperform A$27.25 Target price risk disclosures: NAB AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN 94 122 169 279, AFSL No. 318062) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN 41 002 574 923, AFSL No. 237504) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. 27 July 2015 5