The National Australia Bank Ltd (ASX: NAB) share price will be on watch this week after it surprised the market by bringing forward the release of its half year results and announcing a multi-billion dollar capital raising.
How did NAB perform in the first half?
For the first half of FY 2020, NAB reported a statutory net profit of $1,313 million and cash earnings of $1,436 million. The latter was down 51.4% on the prior corresponding and included notable items of $1,035 million. Excluding these items, cash earnings would have been down 24.6%.
Credit impairment charges increased 158.6% to $1,161 million during the half. As a percentage of gross loans and acceptances, they rose 23bps to 38bps.
Management advised that these charges include $828 million of additional collective provision forward looking adjustments, of which $807 million is a top-up to the economic adjustment to reflect potential COVID-19 impacts.
There was speculation the bank would not pay an interim dividend, but this has not proven to be the case. NAB has declared a 30 cents per share fully franked dividend, down from 83 cents per share a year earlier. Management notes that this cut will boost its Group Common Equity Tier 1 (CET1) by 37bps.
Speaking of which, at the end of the period NAB’s CET1 ratio was 10.39%.
What were the drivers of its result?
NAB’s Business & Private Banking segment posted cash earnings of $1,378 million. This was down 5.7% on the prior corresponding period. Its earnings were impacted by lower fee income and a lower earnings rate on deposits and capital given the low interest rate environment. Costs were also higher due to investment spend partly offsetting productivity benefits.
The Consumer Banking segment reported a 26.4% increase in cash earnings to $699 million. These higher earnings were driven by repricing and lower funding costs in the housing lending portfolio, partly offset by continued competitive pressures. In addition to this, credit impairment charges declined due to the impact of house price movements.
The Corporate & Institutional Banking segment acted as a drag on its result and posted a 10.2% decline in cash earnings to $701 million. This reflects materially lower Markets income, combined with a lower earnings rate on deposits and capital, and competitive pressures impacting its business lending margins. This was partly offset by higher lending volumes and lower credit impairment charges.
Finally, the New Zealand Banking segment reported a 5.6% lift in cash earnings to NZ$562 million. These higher earnings were the result of growth in lending and lower operating expenses benefitting from productivity. This was partly offset by a lower earnings rate on deposits and capital.
As well as releasing its half year result, NAB requested a trading halt whilst it undertakes a capital raising.
NAB is aiming to raise up to $3.5 billion via a fully underwritten institutional share placement of $3 billion and a non-underwritten Share Purchase Plan (SPP) to raise approximately $500 million.
The bank is raising the funds at $14.15 per share, which represents an 8.5% discount to its last close price.
Management explained: “NAB is taking proactive steps to build capital via an equity raising and a reduction in the interim dividend, in light of the uncertain economic outlook due to the COVID-19 pandemic.”
“These actions are intended to provide NAB with sufficient capacity to continue supporting our customers through the challenging times ahead, as well as increasing NAB’s capital level to assist to manage through a range of possible scenarios, including a prolonged and severe economic downturn.”
The capital raising is expected to increase NAB’s CET1 ratio to 11.2% from 10.39% at the end of the first half.