NAB has started off in stellar fashion this year with the key highlights for the first quarter being an increase in cash earnings by 47% over the preceding average, to $1.65bn. The caveat here being that revenue grew only slightly above 1% (though the headline might show otherwise (i.e. -3%), this was a result of MtM losses in markets and treasury income). The cash earnings were driven primarily by a decline in bad and doubtful debts (BDD) to the tune of 98% to $15m and the business continued to see a substantive decline in loan deferrals with home loan deferrals declining to $2bn and $1bn for business loans.

The business has been helped along by Australia’s ever-buoyant property market as well as a favourable policy environment with initiatives like the first home loan deposit scheme.  Management has continued to increase asset quality as reflected by the fall in credit impairment charges and existing deferrals better than the previous year’s guidance. The bank continues to remain well capitalised at 11.7% (CET1), slightly higher than the previous 11.6%. Management has continued to demonstrate a desire to keep up with the times, introducing the first interest free credit card in an effort to keep up with BNPL. Though we don’t see this as substantive, in a similar manner to CBA’s own program, it allows for customer retention and should increase overall profitability per customer.

On the matter of the bottom line, management has continued to deliver on its cost cutting measures with expenses falling 1% in 2H2020 and guidance of a further limitation of 0-2% on expense growth going forward. That said, NIM’s have continued to disappoint slightly, being similar to CBA in reporting a decline.

Red Flags & Risks: Although the market has seemingly forgotten, remediation costs (or them being higher than expected) could continue to plague the business dispite the sale of the MLC business. In addition, much relies on management successfully executing on expense management and strategic initiatives with uncertainty around the commercial lending book.

My Expectations: We remain consistent in our expectation of NIMs to stabilise at 1.55% over the coming eighteen months. On one aspect, we were pleasantly surprised. That aspect is the continued focus on cost reduction by management. Predicated on the others following suit, if NAB moves its online savings deposits more in line with the RBA cash rate then this should add another 3-5bps to their NIMs.

Dividend Yield: Expected yield of 3.7% (assuming a share price of $26.9 AUD).

Going straight to the numbers, NIMs were surprisingly up, up to 1.63% (an increase of 5bps vs. 2H20), though still a laggard among their competitors. This is a great sign to us, especially given the environment surrounding the sector as whole. This was driven primarily by lower funding costs and, most important of all, revenue grew by a stellar 4%. This number excludes the markets division which was our biggest concern through much of last year and remains the big question mark. What has been pleasing to see, however, was that the group reported higher margins on the institutional asset (custodian services, capital raisings, trade finance etc) business.
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From a cash profit perspective, the results came in at a stellar $1.62bn while expenses came in flat, showcasing continued discipline when it comes to the balance sheet and operations. The group remains well capitalised and CET1 came in at 11.7%, comparable to NAB. More importantly, 98% of its home loan deferrals pre-covid have returned to payment with restructuring accounting for 1% and transferals to hardship accounting for another 1%. Within the business loan segment, the numbers stand at 90% of deferrals returning to payment with a further 7% restructured with 3% transferred to hardship. Looking at asset quality, the bad debt benefit remained at $150m. We remain of the view that ANZ’s comparatively more diversified balance-sheet and their remaining institutional business somewhat de-risks the business.

Red Flags & Risks: The NIMs are by far the biggest concern when it comes to ANZ and, while management’s improvement in this aspect is to be applauded, they remain substantially lower than their peers. We had previously predicted that the commercial business might get messy and this has turned out to be rather prescient, though it has been much better than expected.

My Expectations: We had previously expected NIMs to stay flat but the business has proven me wrong and now has momentum behind it. We now expect ANZ’s NIMs to play catchup to their peers over the coming quarters.

Dividend Yield: 3.4% expected yield, based on a share price of $29.10 AUD.

An update to my takeaways from six months ago:
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Leanest and meanest of the lot: CBA (no change)

Cheapest of the lot: Westpac
Previously: NAB. WBC now has momentum behind it.

The laggard of the lot: NAB
Previously: WBC. NAB has continued to deliver as a business, more to do with the fact that Westpac surprised on the upside and is no longer as comparatively cheap.

The one I can’t put a finger on: ANZ (no change)