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Elevator Pitch
My investment rating for National Australia Bank’s (OTCPK:NABZY) (NAB:AU) stock stays as a Hold.
I previously reviewed National Australia Bank’s financial results for the first half of fiscal 2021 (YE September 30) with my earlier write-up for NAB published on June 4, 2021. In this latest article, I evaluate NAB’s FY 2022 financial performance.
I maintain my Hold rating for NAB. National Australia Bank should deliver reasonably good financial results for FY 2023 thanks to substantial net interest margin expansion. However, NAB’s current valuations are fair as compared to historical averages, which makes the stock a Hold (instead of a Buy).
Headline Numbers Were In Line With Market Expectations
National Australia Bank reported its full-year fiscal 2022 financial results last week, and the company’s key financial figures came in line with the sell-side analysts’ expectations.
Net operating income for NAB rose by +9% from A$16,806 million in fiscal 2021 to A$18,296 million in the most recent fiscal year. This was just marginally (-0.2%) lower than the market’s consensus financial estimate of A$18,329 million as per S&P Capital IQ data.
The bank’s underlying profit for FY 2022 was A$10,022 million, which was equivalent to a +12% growth as compared to NAB’s FY 2021 underlying profit of A$8,989 million. According to data sourced from S&P Capital IQ, National Australia Bank’s actual fiscal 2022 underlying profit turned out to be merely -0.7% below the analysts’ consensus financial forecast of A$10,093 million.
In summary, National Australia Bank’s actual headline financial numbers for fiscal 2022 were largely consistent with what the market had anticipated prior to the actual earnings release.
Key Metrics For National Australia Bank
Apart from headline numbers like net operating income and underlying profit, there are other key metrics relating to NAB that warrant investors’ attention.
National Australia Bank’s net interest income increased by +8% from A$13,797 million in FY 2021 to A$14,852 million for FY 2022, even though NAB’s net interest margin contracted by -0.06 percentage points from 1.71% to 1.65% over the same period.
Competitive pressures in the Australian mortgage market led to a decline in NAB’s net interest margin for the recent fiscal year, but this was more than offset by a strong +9% growth in gross loans and advances. At the bank’s FY 2022 earnings briefing, NAB had attributed the +9% increase in its net operating income for the full year to “strong volume growth.”
Based on consensus data taken from S&P Capital IQ, the sell-side was expecting a mid-single-digit percentage increase in National Australia Bank’s net interest income for full-year FY 2022. As such, NAB’s actual high-single-digit percentage net interest income growth beat the market’s expectations.
On the flip side, the increase in National Australia Bank’s operating expenses for the recent fiscal year was higher than what the market expected. NAB’s adjusted operating costs, excluding the effects of the acquisition of Citigroup’s (C) consumer business in Australia, grew by +3.9% for FY 2022.
In comparison, NAB had earlier guided for its FY 2022 adjusted operating expenses to be +3%-4% higher than for FY 2021. Analysts would have expected National Australia Bank’s actual adjusted operating costs to come in somewhere at the midpoint (+3.5%) of its prior management guidance. Instead, National Australia Bank’s actual adjusted operating expenses growth was at the high end of the bank’s earlier guidance, which will be somewhat disappointing for investors.
In a nutshell, the stronger-than-expected net interest income growth for National Australia Bank was negated by higher-than-expected operating expenses for the bank. This explained why NAB’s FY 2022 financial performance was just in line with expectations, as discussed in the preceding section.
Shareholder Capital Return
National Australia Bank performed reasonably well in the area of shareholder capital return for fiscal 2022.
The bank raised its full-year dividends per share by +19% from A$1.27 in FY 2021 to A$1.51 for FY 2022. NAB’s actual FY 2022 dividends translate into a dividend payout ratio of 68%, and it has committed to maintaining a dividend payout ratio of between 65% and 75% for FY 2022. National Australia Bank currently trades at an attractive consensus forward next twelve months’ dividend yield of 5.3% as per S&P Capital IQ data.
In terms of share repurchases, National Australia Bank spent A$3.9 billion to buy back its own shares in the most recent fiscal year. The amount of capital NAB allocated to share buybacks in FY 2022 was equivalent to a significant 4% of NAB’s current market capitalization.
Financial Outlook And Valuations
National Australia Bank is expected to perform even better in fiscal year 2023. According to consensus financial data obtained from S&P Capital IQ, NAB’s net operating income and underlying profit are forecasted to expand by +16% and +24% to A$21.3 billion and A$12.4 billion, respectively for FY 2023.
In my view, the FY 2023 consensus financial projections for NAB are realistic. The key driver of National Australia Bank’s profit growth in FY 2023 will be a significantly higher net interest margin driven by the rising rate environment. Analysts estimate that NAB’s net interest margin will increase from 1.65% in FY 2022 to 1.82% in FY 2023, which is aligned with the management’s comments. National Australia Bank had highlighted at its FY 2022 investor briefing that it sees “further upside from the higher interest rates in FY ’23” and noted that “the benefit to NIM (Net Interest Margin) from cash rate increases” should “peak in first half ’23.”
But positives are already priced into NAB’s valuations. At a time when a majority of stocks are trading at or close to their historical trough valuations, National Australia Bank’s current valuations are closer to (or even above) historical averages.
NAB is currently valued by the market at a consensus forward the next twelve months’ normalized P/E multiple of 12.67 times, which is on par with the stock’s 10-year average P/E ratio of 12.71 times as per S&P Capital IQ data. Separately, NAB’s current trailing P/TBV (price-to-tangible book value) multiple of 1.81 times is higher than its 10-year mean P/TBV metric of 1.70 times.
Closing Thoughts
I rate National Australia Bank’s shares as a Hold. NAB’s FY 2022 performance didn’t disappoint the market, and the bank’s FY 2023 results should be even better. But NAB’s current valuations have already priced in the positives relating to the bank’s good FY 2023 outlook. As such, NAB is a Hold, rather than a Buy.
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