There's no question that banking in Australia is a highly profitable oligopoly, with the four major banks controlling more than 90% of the business and consumer lending markets. National Australia Bank Ltd. (ASX: NAB) is lagging with its share of the Australian banking home loan market currently at 16%, compared to Commonwealth Bank of Australia (ASX: CBA) at 27% and Westpac Banking Corporation (ASX: WBC) at 25%.
Its household deposit market share is similarly lagging, with Commonwealth Bank of Australia leading at 29%, Westpac at 23%, Australia and New Zealand Banking Group (ASX: ANZ) at 15% and NAB at 15%.
In the past 10 years, NAB's profits have grown by just 2.2% per year from $4.3 billion to $5.3 billion, while its earnings per share (EPS) have fallen by 2.2% per year in the same time.
When you compare key financial ratios for the top four banks, they show that NAB ranks fourth in return on assets, net interest margins, cost to income and change in bad debts.
The $5.5 billion capital raising
In a recent announcement, NAB chief executive Andrew Thorburn unveiled a plan to raise capital and offload the Scotland-based Clydesdale bank through a demerger and partial float. The $5.5 billion raising is the biggest rights issue in Australian corporate history.
With around 60% of the $5.5 billion raised intended to support potential future compensation payouts to British customers, this leaves around $2.2 billion.
This capital raising is just the start of a phase of capital building by NAB, in response to looming regulatory changes requiring banks to be more resilient to shocks.
Australia's banking regulator is pushing ahead with changes that will force banks to model risk more conservatively and therefore hold more capital against mortgages. The government's financial system inquiry recommended banks be "unquestionably strong" resulting in capital imposts on all banks.
In more bad news for NAB, a slowdown in core earnings growth has resurfaced because of slower-than-expected business loan growth, margin compression, higher 'redress' costs in the UK, slower growth in banking fee income, subdued wealth and markets income, and a worse-than-expected cost outcome.
And, while the cost of wholesale funding is easing, pressure on lending and deposit rates is reducing NAB's net interest margin. When stress returns to global credit markets, wholesale funding costs will increase as well as reduce availability. The focus on loan growth has delivered strong market share gains, but when loan growth exceeds deposit growth, more expensive wholesale funding will be required to fill the funding gap.
Finally, execution risk is increasing as the group's repositioning strategy unfolds. Even if NAB can successfully deliver on its turnaround strategy, this restructuring and culture change will have significant impact on staff morale and productivity.
Poor price performance
In the past 12 months, the share price of NAB has grown by just over 4%, which is in line with growth in the S&P/ASX 200 (Index: ^AXJO)(ASX: XJO), lower than Commonwealth, and ahead of ANZ and Westpac.
Valuation
The price-to-earnings ratio for NAB is around 13, and the price-to-book ratio is 1.8. I currently value NAB at around $35, but even at this price it will not provide any reasonable future returns. That's why I think now is the time to sell.
