Is NAB’s half-year result a cause for concern? Analysts weigh in as shares hit 10-month lows

National Australia Bank (ASX: NAB) shares hit a 10-month low on Thursday after its first-half results missed consensus expectations due to lower-than-expected net interest margins and guidance of further margin headwinds.

The margin decline was primarily attributed to back book repricing pressures on mortgages and an acceleration in deposit pressures from saving products and term deposits.

NAB 12-month price chart

Half-year at a glance

Key operating metrics:

• Cash net profit of $4.07 billion, up 12.3%

  • Below consensus estimates of $4.16 billion

• Net interest margin of 1.77%

• CET1 ratio of 12.2% 

• Interim dividend of 83 cents per share, up 5%

  • Below consensus estimates of 84 cents per share

• Cash payout ratio of 64.1%, down from 68.5% a year ago

Segment cash earnings:

• Business and Private Banking $1.71 billion, up 8.3%

• Personal Banking $785 million, down 0.4%

• Corporate and Institutional Banking $940 million, up 16.6%

• NZ Banking $759 million, up 20.5% 

What analysts are saying

Goldman Sachs: NIM missed expectations but underlying improvement in returns is not reflected in its current valuation. A BUY rating was maintained with a $30.69 target price.

• “We see volume momentum over the next 12 months as favouring commercial volumes over housing volumes, and we believe NAB provides the best exposure to this thematic.”

• “NAB’s strong capital surplus position (A$3.1 bn of surplus capital above the top-end of its target CET1 range of 11.0-11.5%) allows flexibility for further buy-backs.”

Macquarie: The result was overshadowed by a disappointing margin outcome, weighed by mortgage competition and funding headwinds. Underlying performance across the business remains sound, with key positives including sector-leading provisions and a solid capital position. A NEUTRAL rating was maintained with a $28.00 target price.

• “Continuation of current pricing trends suggests that higher rate benefits will be largely passed to borrowers rather than shareholders.”

• “NAB is trading at a ~14% and ~6% premium to ANZ and WBC, respectively, but a ~29% discount to CBA.”

• “However, with challenging sector trends, we see limited scope for re-rating in the near term and maintain a Neutral recommendation.”

UBS: First-half numbers were in-line with expectations, outside of NIMs. NIM outline was worse-than-expected and new headwinds through the second half could take off another 4-7 bps from the first-half figure. UBS is SELL rated with a $25.00 target price.

• “With the share price trading at a higher relative valuation to peers, we see better value elsewhere among our coverage universe, hence our Sell rating.”

• “... our base case forecasts we have cash earnings now declining ~4% in FY24E and ~3% in FY25E, with the ROE contracting ~200bps”

Morgan Stanley: The main drivers of NAB’s mid-2020 to late 2022 performance is losing steam and it now faces a combination of ‘slowing loan growth, falling margins, rising costs and higher impairment charges.’ A EQUAL-WEIGHT rating was retained with a $27.70 target price. 

• “We forecast cash earnings to rise ~5% this year, driven by positive 'jaws' of +3.5% and pre-provision profit growth of ~16%. However, we forecast earnings to fall ~17% next year, with a ~6% decline in pre-provision profit and a ~14bp increase in the loan loss rate.”

• “NAB remains #3 in our major bank order of preference, pending results from other major banks soon.”

Across 16 sell-side ratings, the average NAB price target was lowered by 5.2% to $28.33 – This suggests an upside of 7.3% from the stock’s open on Friday of $26.40.