The Morningstar analysis, released on Tuesday, indicated that the research firm had not downgraded its outlook for NAB despite the bank reporting a slump in earnings of over 50 per cent as it made provisions for an explosion of bad debt as a result of the COVID-19 crisis.
“It can be easy to overlook the positives given the headline numbers, but we liked that net interest margins were held flat at 1.78 per cent, operating expenses ex large notable items were only 0.4 per cent higher and loan balances increased by 2 per cent,” the report said.
“CEO Ross McEwan is not proposing a revolutionary new strategy, but wants the bank to be simpler, digital enabled, and relationship led. It all comes down to execution, and pleasingly he does not foresee an elevated annual investment to achieve his plans.”
The research firm said the bank’s $3.5 billion capital raise, flagged in its half-year results announcement on Monday, would be enough to get it through the “worst-case scenario” of an up to 3 per cent GDP contraction in 2020 and 2.5 per cent decline in 2021.
In regards to its divestment of MLC Wealth, Morningstar said the transaction, which had been delayed from 2019, was “progressing toward a public market exit via demerger and IPO options”.
“The bank retains flexibility to consider a trade sale,” the report said.
While the analysis projected business loans in the bank to grow by 13 to 16 per cent for the full year, it also flagged that the majority of these new loans would be drawdowns on existing loan facilities from businesses hit by coronavirus who were requiring extra credit.
“Larger loan balances will support growth in net interest income, but over the short-term rising loan losses are more than negating the benefit to the bottom line,” the report said.
However, the research firm was confident the bank’s mortgage book would not be too adversely affected by the crisis, due to its “tight underwriting standards, lender’s mortgage insurance, low average loan to value ratios, high incidence of loan prepayment, full-recourse lending [and] high proportion of variable rate loans”.
Morningstar said its projection of a $3 billion full-year profit for NAB had not changed, factoring in $750 million to be set aside for payment of AUSTRAC and ASIC penalties.
“Resolution of both matters may be delayed given priority has been given to coronavirus responses,” the research firm said.
However, it said overall regulatory and compliance costs were increasing for the bank, which would put pressure on its margins as the Reserve Bank likely continued on an easing path.
