NAB 2H profit should beat consensus: Morgan Stanley

By Market Index
Fri 04 Nov 22, 6:29pm (AEST)
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Source: iStock

Key Points

  • JPMorgan suggests investors look more towards banks and reduce exposure to interest rate sensitive sectors
  • Macquarie expects banks to deliver strong margin trends in the near-term
  • Morgan Stanley expects NAB's net interest margin to climb to 1.69%, up from 1.5% in FY21

Morgan Stanley expects investors to vote with their feet if National Australia Bank (ASX: NAB) doesn’t deliver a clean second half result, with pre-provision profit and cash profit (ex-notable items) at or above consensus forecasts of $5,284m, and $3,637m respectively when it reports next Wednesday.

With key focal points expected to include margin expansion growth, loan and deposit growth trends, the outlook for expense growth, and balance sheet settings, the market is expecting the bank to deliver a cash profit of $7.2bn for the year ended September 30.

While Morgan Stanley expects the bank to exceed consensus estimates, the broker will be paying close attention to differences versus peers in the size of mortgage headwinds, deposits tailwinds and mix impacts.

Watch NIM Closely

With banks having boosted their loan rates faster than rate rises for savings accounts, Morgan Stanley suggests investors pay close attention the bank’s net interest margin (NIM – aka as a bank's primary income source).

The broker expects the bank’s NIM to climb to 1.69%, up from 1.5% in FY21, and then hit 1.87% over the interim to 31 March 2023.

The broker retains an Equalweight rating on the bank, with its target price of $29.60 marking the lower end of broker valuations (as reported in by FN Arena).

JP Morgan is Overweight banks

Looking beyond National Australia Bank, JPMorgan suggests, in light of higher interest rates and a weak A$, investors look more towards banks and reduce exposure to interest rate sensitive sectors, like real estate and retail.

Last month the broker upgraded Australian bank stocks to Overweight on expectations that rising interest rates will push profit margins higher.

JP Morgan expects bank stocks to grow by 10 to 15% cumulatively over the next two years within a challenging environment.

“The Australian household is in a stronger position than most, and it looks as though a wage price spiral is very unlikely here. So, we’re positive on Australia.”

Two-edged sword

While Jason Beddow of Argo Investments admits the big four banks are in solid shape from a balance sheet perspective, he reminds investors there’s a downside to higher rates.

He expects to see a continuation of poor share price growth for the big-four banks over the next year, with growing mortgage affordability issues potentially impacting loan books.

While Beddow expects dividend payouts to remain at reasonable levels, he reminds investors that shares in the big-four typically fall along with house prices.

While recent CoreLogic’s data revealed the biggest monthly decline in national house prices since 1983, forecasts are flagging a peak-to-trough fall of -15% to -25%.

Macquarie is more bullish

However, if Commonwealth Bank’s (ASX: CBA) full year FY22 result is any kind of proxy, the other big-three could well outperform at FY22.

As a case in point, at FY22 CBA recorded NIM of 1.90%, up from 1.8% in FY21, while net profit and pre provision profit were up 9% and 3.1% respectively.

Macquarie also has rosier outlook for banks and expects them to deliver strong margin trends in the near-term, leading to 'meaningful upgrades' over the next twelve months.

In a recent client update, the broker expected the market to put a high multiple on a margin beat, with the sector at large expected to perform well throughout the earnings upgrade cycle.

"While we expect banks to highlight earning offsets from higher expenses and slower volume growth, we expect margin dynamics to overshadow those themes."

National Australia Bank share price over 12 months.


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