Investors weren't excited about National Australia Bank Ltd.'s (ASX: NAB) half year results released this morning but its earnings news is more positive than Australia and New Zealand Banking Group's (ASX: ANZ) profit announcement on Tuesday.
ANZ's share price has been rallying since it handed in its report card (read about the key takeaways on ANZ's results here) while NAB has slumped 1.1% in early trade to $29.26, but I think this has more to do with valuation than NAB's results as its shares weren't trading at the same discounts as its peers.
But I think the investors are overreacting as there are a number of things to like about NAB's results, which actually give big bank bulls more reasons to come charging back into the sector.
The biggest contrast between ANZ's and NAB's profit announcements, in my view, is that NAB's outlook statement seems a lot more upbeat – perhaps because NAB feels less tainted by the Banking Royal Commission.
NAB painted a reasonably upbeat picture for the Australian economy (and by extension, their operating outlook) by focusing on the "solid growth" for the local economy, while ANZ tampered its take on economic growth by highlighting the challenges ahead, including the negative impact (and $50 million legal bill) from the Banking Royal Commission.
The Royal Commission barely scored a mention in NAB's announcement, apart from a brief acknowledgement that it could do better by customers.
NAB's dividend policy also hinted at a more confident management team. While it held its interim dividend steady at $0.99c a share, its payout ratio jumped to 96.9% of profit from 79.9% this time last year.
The ratio will probably drop going forward as its messy profit result had a number of one-off items like a huge restructuring cost that triggered a 16% drop in cash earnings to $2.76 billion, although if you excluded these abnormal items, cash earnings would be relatively flat at $3.29 billion.
ANZ's interim payout ratio dropped and management didn't commit to a further share buyback with the excess cash on its balance sheet as some analysts had been counting on. Its board needed a security blanket and I can't blame them given what's happening in the sector.
What could take the market by surprise though is NAB's revenue and net interest margin (NIM). Many experts are anticipating pressure on both given the slowing credit growth environment and rising funding costs.
But the bank has defied sceptics to post a respectable 5.6% increase in net interest income to $6.75 billion over the first half of FY17, while NIM lifted 5 basis points to 1.87%. This suggests that NAB has not been as aggressive in cutting rates on mortgages to win market share as some of its peers have.
Further, its greater exposure to infrastructure and business lending could be helping the bank weather the slowing housing market better than Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC).
This is a relief to me as this is the key reason why I own NAB shares.
Investors may also be pleased to hear that NAB will be selling or floating its wealth investment business MLC, which it purchased in 2000. The bank had divested CYBG PLC/IDR UNRESTR (ASX: CYB), or Clydesdale Bank, in 2016.
On the flipside, costs are rising faster than income with the bank's cost-to-income ratio blowing out by 950 basis points to 52.2%. Even if you excluded the restructuring costs, the ratio would still be 120 basis points higher at 43.9% in the latest half compared to the same time last year.
Rising costs will be an ongoing issue in the bank sector so I won't be surprised to see this trend persist for the next few profit results.
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