NAB 1H 2015 Results – UK Exit, Stage Left – DFA Research Alert

NAB today announced their results for 1H 2015, which completes the updates from the major banks this week. Somewhat similar themes, with volumes up but lending margins down, offset by some deposit repricing and lower provisions. The hand of the regulator can be seen on the Australian home loan business, but significantly NAB outlined an exit path from the UK requiring capital, and other strategic initiatives, and a rights issue. No commentary on the potential demands by higher regulatory capital.

On a statutory basis, net profit attributable to owners of the Company was $3.44 billion, an increase of $584 million or 20.4% compared with March 2014. Cash earnings were $3.32 billion, an increase of $170 million or 5.4% with improved performances across all major businesses. This was in line with expectations. Excluding prior period UK conduct related charges, cash earnings rose 0.3%. Analysis of the results shows a trade off between volume growth and margin.

NAB-May-2015-1Revenue increased 3.1%. Excluding gains on the UK Commercial Real Estate (CRE) loan portfolio sale and SGA asset sales, revenue rose 2.2% benefitting from higher lending balances, the impact of changes in foreign exchange rates, stronger Markets and Treasury income and increased NAB Wealth net income. Group net interest margin (NIM) declined 2 basis points over the year and 1 basis point when compared to the September 2014 half year.

NAB-May-2015-2Expenses were broadly flat but excluding a fine paid in relation to UK conduct and prior period UK conduct related charges rose 4.0%. The increase mainly reflects the impact of changes in foreign exchange rates, investment in the Group’s priority customer segments and higher technology costs, combined with occupancy and Enterprise Bargaining wage increases.

Improved asset quality resulted in a total charge to provide for bad and doubtful debts (B&DDs) of $455 million, down 13.8%. This primarily reflects lower charges in UK Banking and NAB UK CRE. Compared to the September 2014 half year, the B&DD charge rose 30.4% due to releases from the Group economic cycle adjustment and NAB UK CRE overlay of $104 million in the prior period which were not repeated. Group asset quality metrics continued to improve over the period. The ratio of Group 90+ days past due and gross impaired assets to gross loans and acceptances of 0.85% at 31 March 2015 was 34 basis points lower compared to 30 September 2014 and 67 basis points lower compared to
31 March 2014.

The Group’s Basel III Common Equity Tier 1 (CET1) ratio was 8.87% as at 31 March 2015, an increase of 24 basis points from September 2014. As previously announced, the Group’s CET1 target ratio from 1 January 2016 remains between 8.75% – 9.25%, based on current regulatory requirements. The interim dividend is 99 cents per share (cps) fully franked, unchanged from the prior interim dividend, and below market expectations.

For the March 2015 half year the Group has raised approximately $17.3 billion of term wholesale funding. The weighted average term to maturity of the funds raised by the Group for the March 2015 half year was approximately 5.0 years.

The Group’s quarterly average liquidity coverage ratio as at 31 March 2015 was 118%. The ratio of collective provision to credit risk weighted assets was 1.01% at 31 March 2015 compared to 0.83% at 30 September 2014 with the increase over the period reflecting transition to AASB. The ratio of specific provisions to impaired assets was 35.5% at 31 March 2015, which compares to 35.3% at 30 September 2014 and 34.8% at 31 March 2014.

There were two significant strategic announcements in the results.

UK Exit – this was signalled in October 2014 as a result of the strategy to focus on the Australian and New Zealand franchise. Significant work has since been undertaken on various exit options, in particular public market options which offer increased certainty on the ability to transact and timing. While remaining open to a trade sale, NAB intends to pursue a public market option of a demerger of approximately 70-80% of Clydesdale Bank’s holding company National Australia Group Europe Ltd and its subsidiaries (Listco) to NAB shareholders and a sale of the balance by way of IPO (approximately 20-30%) to institutional investors. A demerger accelerates the full exit of the UK business, as opposed to a prolonged multi-staged public market sell-down, and allows an exit to be targeted by the end of this calendar year, subject to market conditions. The consequences for NAB will be a reduction in cash earnings on separation of Listco with shares in Listco to be received by NAB shareholders, whilst  NAB cash ROE should increase on separation; the transaction expected to have a broadly neutral impact on NAB’s capital position excluding the capital support to Listco which will receive capital support of £1.7bn is, from separation, expected to be a full deduction from NAB CET1. Actual losses lower than £1.7bn should result in a capital release for NAB over time. Post separation, future actual conduct cost will be recognised by NAB within discontinued operations outside of cash earnings with no impact on capital (netted against £1.7bn support).  No impact on NAB’s credit ratings expected

NAB Wealth today announced it has received APRA approval for its life insurance arm to enter into a reinsurance arrangement with a major global reinsurer for approximately 21% of its in-force retail advised insurance book. The transaction is expected to release approximately $500 million of CET1 capital (13 basis points) to the NAB Group, and represents approximately 15% of NAB Wealth’s life insurance embedded value. This is expected to result in a reduction in NAB Wealth cash earnings of approximately $25 million per annum.

Also, NAB will be undertaking a 2 for 25 fully underwritten pro rata accelerated renounceable rights issue with retail rights trading (the Entitlement Offer) at an offer price of $28.50, to raise approximately $5.5 billion. Approximately 194 million new NAB ordinary shares are to be issued (approximately 8.0% of issued capital). New shares issued under the Entitlement Offer will rank equally with existing shares from the date of allotment. New shares will not however be entitled to the interim dividend for the half year ended 31 March 2015 of 99 cps because they will not be issued before the dividend record date.

Looking at the segmentals, Australian Banking cash earnings were $2,574 million, an increase of 4.0%, with revenue the key driver. Revenue rose 3.9% reflecting a stronger trading performance, combined with higher volumes of housing and business lending, partly offset by weaker margins. Expenses rose 3.8% driven by additional service roles and front line business bankers, combined with Enterprise Bargaining wage increases and higher technology costs. Cost to income rose by 10 basis points to 40.7%. Asset quality metrics continued to improve and B&DD charges of $366 million fell 2.4%, benefitting from lower business impairment activity partly offset by higher collective provision charges including a $49 million overlay for agriculture and resource sectors. NIM declined 3 basis points to 1.60% as a result of asset competition and lending mix impacts.

NAB-May-2015-5Although NAB experienced above system growth in mortgages, margins on home lending were squeezed 5 basis points.

NAB-May-2015-3Broker volumes grew from 30.2% to 30.9% of loans originated. There was a net 209 increase in brokers across aggregators PLAN, Choice and FAST – currently 3,700 affiliated brokers, and a 31% increase in white label transaction. LVR’s over 80% were circa 20% of transactions, and around 15% of book, with a slight fall above 90%.

NAB-May-2015-6Looking at the loan portfolio mix, 28.8% of loans were for investment property (up from 28.2% in Sept 2014), and 35% of loans were interest only.  The average balance was $276,000. 90 Day past due was 0.48% and impaired loans 0.14%. The loss rate is 0.03%. Home loan impairment is lower through the broker channels than proprietary channels (opposite to what the regulator says, by the way, but consistent with our own modelling).

NAB-May-2015-4Steps are being taken to slow growth in investor mortgage lending to meet APRA’s 10% YoY threshold – currently 13%, and they say they are on track to comply with APRA’s best practice serviceability guidelines by June 2015 – floor rate comfortably above 7.0% and serviceability buffer comfortably above 2.0% (including buffer on existing debt). Interest only lending assessed on a principal and interest basis. This shows the regulator is having an impact and that lending criteria are tightening.

NZ Banking local currency cash earnings rose 4.5% to NZ$418 million with higher revenue given steady growth in lending volumes and improved margins (up 7 basis points, but with a 13 basis fall in lending margin, offset by 10 basis point rise in deposit margin, as well as funding and capital benefits) reflecting lower funding costs and benefits from both higher capital levels and higher earnings on capital. Costs rose 1.8% due mainly to increased personnel expenses, but were broadly flat compared to the September 2014 half year. Cost to income ratio rose 80 basis points to 40.2% B&DD charges were higher over the period with lower collective provision write-backs, but were flat over the six months to 31 March 2015 given the continued benign credit environment.

NAB Wealth cash earnings increased 28.2% to $223 million reflecting improved results from both the investments and insurance businesses, and lower operating expenses. Net income rose 8.0% due to improved insurance claims performance, stable lapses and growth in funds under management (FUM) as a result of strong investment markets, partly offset by lower investment margins related to a change in business mix. Cost to income ratio fell by 7.7% to 67.9%. There was no repeat of the insurance reserve increases seen in prior periods.

UK Banking local currency cash earnings grew 35.6% to £99 million driven by a further material reduction in B&DD charges as the business benefitted from improved economic conditions and loan portfolio shifts. Revenue was slightly weaker despite good growth in home lending volumes with competitive pressures resulting in NIM decline of 11 basis points from lending, points. Costs fell 1.2% (cost to income up 10 basis points to 70.3%) with increased restructuring and marketing spend more than offset by a one-off pension scheme gain in the March 2015 half year and conduct related charges that were incurred only in the March 2014 half year.

Latest Edition Of The Property Imperative Released Today

The Property Imperative, Fourth Edition, published April 2015 is available free on request. This report which summarises the key findings for our research into one easy to read publication. We continue to explore some of the factors in play in the Australian residential property market by looking at the activities of different household groups using our recent primary research, customer segmentation and other available data. Specifically we look at the property investment juggernaut and how we are becoming a nation of  property speculators. It contains:

  • results from the DFA Household Survey to end March 2015
  • a focus on first time buyer behaviour and overseas property investors
  • an update of the DFA Household Finance Confidence Index

PropertyImperativeLargeGo here to request a copy.

From the introduction:

This report is published twice each year, drawing data from our ongoing consumer surveys and blog. This edition dates from April 2015.

The Australian Residential Property market is valued at over $5.4 trillion and includes houses, semi-detached dwellings, townhouses, terrace houses, flats, units and apartments. In the past 10 years the total value has more than doubled. It is one of the most significant elements driving the economy, and as a result it is influenced by state and federal policy makers, the Reserve Bank, Banking Competition and Regulation and other factors. Residential Property is therefore in the cross-hairs of many players who wish to influence the economic fiscal and social outcomes of Australia. The Reserve Bank (RBA) has recently highlighted their concerns about potential excesses in the housing market is on their mind, when considering future interest rate cuts.

According to the Reserve Bank (RBA), as at February 2015, total housing loans were a record $1.43 trillion , with investment lending now at a record 34.4%, and representing more than half of all loans made last month. There were more than 5.2 million housing loans outstanding with an average balance of about $241,000. Approximately two-thirds of total loans were for owner-occupied housing, while one-third was for investment purposes. 36.9% of new loans issued were interest-only loans. This report will explore some of the factors in play in the Australian Residential Property market. We will begin by describing the current state of the market by looking at the activities of different household groups leveraging recent primary research and other available data. We also, in this edition, feature recent research into first time buyers and foreign investors; and look at household finance confidence.

Latest DFA/JP Morgan Mortgage Industry Report Launched Today

The latest report, volume 20 of the Mortgage Industry Report series was released today. As well as over viewing current industry trends, this time we focus on some of the mortgage pricing issues in the light of the FSI interim report, capital and funding.

JPM authored their report using DFA research data as detailed in the Property Imperative which is available on request from DFA. Because of compliance issues the final JPM version of the report is only available direct from them.

Go here for more details of our research programmes, and for media requests, go here.


Latest DFA/JP Morgan SME Report Launched Today

The latest report, volume 7 of the SME Report series was released today. As well as over-viewing current industry trends, this time we focus on sectoral rotation, with SME’s in the construction industry feeling more confident, whilst other sectors remain patchy. We do not see a significant rise in demand for credit anytime soon.

JPM authored their report using DFA research data as detailed in the DFA SME Report already published and available on request from DFA. Because of compliance issues the final JPM version of the report is only available direct from them.

Go here for more details of our research programmes, and for media requests, go here.


Latest DFA/JP Morgan Mortgage Industry Report Launched Today

The latest report, volume 19 of the Mortgage Industry Report series was released today. As well as over viewing current industry trends, this time we focus on the digital transformation of financial services, and highlight some of the challenges and opportunities for both existing and new players.

JPM authored their report using DFA research data as detailed in the Property Imperative and The Quiet Revolution, both of which are available on request from DFA. Because of compliance issues the final JPM version of the report is only available direct from them.

Go here for more details of our research programmes, and for media requests, go here.



Latest Household Channel Preference Report “The Quiet Revolution” Released

DFA has released its latest report “The Quiet Revolution”, a study of household banking channel preferences, which is available free on request. The report examines preferences across customer segments, and across the sales and service value chains and also looks at how new online players may disrupt the status quo. From the introduction:

QuietRevCover“DFA has just updated the 26,000 strong household survey examining their channel preferences. This report summarises the main findings.

We conclude that the move towards digital channels continues apace, facilitated by new devices including smartphones and tablets, and the rise of “digital natives” – people who are naturally connected.

We outline the findings across each of our household segments, and also introduce our thought experiment, where we tested household’s attitudes to the various existing and emerging brands in the context of digital banking. We found a strong affinity between digital natives and the emerging electronic brands, and a relative swing away from the traditional terrestrial bank players.

These trends create both threat and opportunity. The threat is that traditional channels, especially the branch, become less relevant to digital natives, and becomes the ghetto of older, less connected, less profitable customers. The future lays in the digital channels, where the more profitable and digitally aware already live. Players need to migrate fast, or they will be overtaken by the next generation of digital brands who are looking towards becoming players in financial services. The game is on!”

Request the report [25 pages] using the form below. You should get confirmation your message was sent immediately and you will receive an email with the report attached after a short delay.

Note this will NOT automatically send you our research updates, for that register here. You can find details of our other research programmes here.

New Report – “The Property Imperative III” Launched

DFA released a new and updated edition of the Property Imperative in September 2014. More recent research as featured on this blog, will be incorporated in a revised edition early in 2015.

The-Property-Imperative-III-CoverThis report explores some of the factors in play in the Australian residential property market by looking at the activities of different household groups using our recent primary research, customer segmentation and other available data. It contains:

  • results from the DFA 2014 Household Survey to end August 2014
  • a focus on first time buyer behaviour and ongoing affordability
  • a special feature on loan to income analysis by segment and state.

The report is available free on request, and can be obtained here. More details of our research programme can be found here. Our approach to customer segmentation is described in our recent post, a Segmentation Cookbook.


DFA International House Price Comparison Index

DFA has published its first International House Price Comparison Index. Whilst many reports include international comparisons of property prices, using data from various sources, when you dig into them, often they do not show what you think they might, because the relative scales, and start points are often out of synch, or the data is not reported on the same basis. DFA has gone back to primary sources, including Corelogic and Federal Housing Finance Agency for the US, the Reserve Bank of New Zealand, the Office of National Statistics for the UK, and the Australian Bureau of Statistics to establish a house price index on a comparable basis.

We used data from 2000 as a baseline, and produced a relative movement index from then to the end of 2013, tracking relative movements in house prices over time. The results are in looking at data from the major centres in each country but we also include Sydney as a separate data point because of discussion about the momentum there.

Price-TrendUntil 2004, prices were moving up around average inflation rates, but then we see the US, running up to a peak, prior to the GFC, as markets ran hot, then falling significantly, and is now in recovery. The UK took a hit post the GFC, did not fall as fast, and is recovering now. New Zealand reveals high growth, some correction post GFC, but wins the growth prize relatively speaking, out-performing Australia – one reason why the Reserve Bank of NZ moved to limit credit last year.

Turning to Australia, we see the capital city markets growing relatively consistently, albeit with a GFC induced wobble. We also find the relative growth outside Sydney is higher than in Sydney, because the 2000 baseline there was higher. For example, the median price in Sydney was $310k in 2000, and is now $605k, wheres in Adelaide it was $141k (2000) and is now $395k. Hobart was $104k (2000) and is now $345k and Darwin was $161k (2000) and is now $565k. We can also look at the relative annualised growth rates over the trend period. Darwin is the winner, followed by Hobart and Perth.


So, two observations, first, by international standards, property price growth in Australia is at the high end as I discussed recently, and second, the relative growth has been a lot stronger away from Sydney, yet much of the recent talk has been about a bubble IN Sydney! We see again the impact of the structurally high property prices thanks to poor policy, easy credit and lack of supply. We have a national property problem, not a local Sydney one!

We plan to update our index regularly as new data is published.

Joint JP Morgan and DFA Mortgage Industry Report

The latest Volume 18 of this joint report was released today. We expect to see some media coverage. The entire JP Morgan report is not available via DFA because of the proprietary nature of their material. However, the report contains the household survey data from The Property Imperative Report. This is available on request.

Request the Property Imperative Report