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| How NAB Shares Hit a Nine-Year High Despite a Profit Slump. |
If you are a shareholder of National Australia Bank (NAB), you might be feeling a bit confused right now.
On one hand, you are probably happy to see your shares surge to their highest level in about nine years, thanks to a better-than-expected first-quarter cash profit.
On the other hand, you might be wondering why the bank’s cash earnings actually slumped by almost 17%, and what that means for its future prospects.
Well, don’t worry, because I’m here to explain the paradox of NAB’s performance, and why it’s not as bad as it sounds. In fact, there are some good reasons to be optimistic about Australia’s top business lender, even as it faces some headwinds in the economy and the market.
Let’s start with the positive news. NAB reported a cash profit of A$1.80 billion ($1.2 billion) for the quarter ended Dec. 31, 2023, which was 4% ahead of a Visible Alpha estimate, according to Citi.
- This was mainly driven by income from its markets and treasury portfolio, which boosted its revenue by about 1% for the quarter.
- This was enough to impress the investors, who pushed the shares of the Melbourne-based lender up by as much as 1.8% to A$34.10, their highest since May 14, 2015, as of 0125 GMT.
- The stock is set to gain for the fifth straight day, making it one of the best performers among the big four banks.
NAB’s Chief Executive Officer Ross McEwan said in a statement that the results reflected a “continued disciplined approach to growth during what remained a highly competitive period”.
He also said that he remains optimistic about Australia’s economy, which he described as resilient, and that the majority of NAB’s customers were faring well.
The Bad: NAB’s Cash Earnings Slump Due to Higher Costs and Margin Pressure
Now, let’s look at the not-so-good news. NAB’s cash earnings slumped by 16.9% from A$2.15 billion in the prior corresponding period, due to higher cost pressures, deposit costs, and competitive lending, which in turn impacted its margins.
The bank’s net interest margin, which measures the difference between the interest it earns from loans and the interest it pays to depositors and other lenders, fell by 7 basis points to 1.78%.
- This was partly due to the low interest rate environment, which has squeezed the profitability of banks across the board.
NAB also faced higher costs, which rose by 2% on a quarterly average basis, compared to the second half of 2023.
- This was partly due to the bank’s ongoing investment in technology, risk, and compliance, as well as some one-off expenses related to its exit from the UK market.
The bank’s return on equity, which measures how well it uses its shareholders’ funds to generate profits, also declined by 1.6 percentage points to 9.8%. This was below its target range of 10% to 12%, and also lower than its peers.
The Ugly: NAB Faces Downside Economic Risks and Regulatory Uncertainty
Finally, let’s look at the ugly news. NAB faces some downside economic risks and regulatory uncertainty, which could pose challenges for its growth and performance in the future.
While NAB’s outgoing CEO Ross McEwan said that Australia’s economic growth had slowed, he did not mention the potential impact of the coronavirus outbreak, which has disrupted global trade and travel, and could dampen consumer and business confidence.
Australia’s biggest lender, Commonwealth Bank of Australia (CBA), warned of these risks earlier this month, as it posted a drop in profits.
CBA said that it expects the coronavirus to have a “meaningful” impact on the economy, and that it has increased its provisions for bad debts by A$100 million to account for the potential losses.
NAB also faces some regulatory uncertainty, as it awaits the outcome of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which exposed widespread malpractice and misconduct in the sector.
The commission made 76 recommendations for reform, which could affect the bank’s operations, governance, and culture.
NAB has already paid A$1.1 billion in customer remediation costs, and has set aside another A$1.1 billion for future payments.
The bank has also been hit with a class action lawsuit by shareholders, who allege that it misled them about the impact of the commission’s findings on its share price.
The Verdict: NAB Is Not Out of the Woods Yet, But Has Some Bright Spots
So, what’s the verdict on NAB’s performance? Well, it’s not all doom and gloom, but it’s not all sunshine and rainbows either.
The bank has some bright spots, such as its revenue growth, market beat, and optimism about the economy. But it also has some dark spots, such as its profit slump, margin pressure, and regulatory woes.
