Things may be starting to look up for ASX banks in 2020 with the Banking Royal Commission and not-so-onerous regulatory change in New Zealand, but some of them aren't out of the woods yet.
One of the big four that may not be able to avoid a dividend cut and capital raise next year is National Australia Bank Ltd. (ASX: NAB), according to Morgan Stanley.
This means the stock could struggle to outperform in the new year as investors are sensitive about dividends while questions about its balance sheet will drag on sentiment.
NAB share price to underperform in 2020
NAB is the second best performing big bank stock on the ASX. Its shares are up around 6% in 2019 when the Australia and New Zealand Banking Group (ASX: ANZ) share price is sitting on a 2.5% gain and Westpac Banking Corp (ASX: WBC) is 1% in the red.
The only big bank to beat NAB is the Commonwealth Bank of Australia (ASX: CBA). The CBA share price is up nearly 12%, although that's still shy of the 21% increase in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
It seems NAB at least will struggle to close the gap in the new year, if Morgan Stanley is right.
Squeezing shareholders
"Our new work suggests NAB continues to lag peers on efficiency so the new CEO will accelerate the transformation from 2020," said the broker.
"However, this requires additional restructuring and investment spend. We forecast an ~A$3.5bn capital raising and a further 10% dividend cut in FY20E."
This means NAB's forecast dividend yield is sitting at 6%, or 8.5% with franking. That isn't so bad as far as yield goes, but the need to tap investors on the shoulder for an extra $3 billion plus in capital dampens the outlook.
Least efficient big bank
The bank's new boss Ross McEwan is hoping to save more than $1 billion from phase 1 of the bank's transformation program from FY18 to FY20. But the costs required to execute the program is estimated at $2.7 billion and Morgan Stanley points out that NAB will still be less efficient than its peers in the current financial year.
Morgan Stanley rates the stock as "underperform" (equivalent to a "sell") and cut its price target to $24 from $25.60 a share. There are several reasons for its dim view of NAB.
"We stay UW [underweight] given housing loan growth is negative, the outlook for margins and fees is deteriorating, further "transformation" re-investment is under-estimated by investors, loan losses are drifting up, the AUSTRAC contingent liability creates uncertainty, a capital raising and further dividend cut appear likely, and trading multiples are full," said the broker.
