Target Price: $32.50 | Downside: -9.7% | April 30, 2025
Investor Profile Snapshot
| INCOME | VALUE | GROWTH | QUALITY | THEMATIC |
|---|---|---|---|---|
| ★★★★☆ 85% | ★★★☆☆ 70% | ★★☆☆☆ 45% | ★★★★☆ 80% | ★★★☆☆ 65% |
Note: This report provides analysis and commentary based on public information and is not intended as investment advice. Investors should conduct their own research and consult with financial advisors before making investment decisions.
The rest of the banks should quickly follow suit from this NAB release. I will send out another email when the rest of the banks have been rolled out. Trying to avoid as much unnecessary contact as possible.
Hope everyone has been enjoying this (and more importantly, benefitting from it).
Latest Update - Q1 FY2025 Key Takeaways
- Cash earnings showing signs of stabilization after 8.1% decline in FY2024
- Business lending growth maintained at 8% year-on-year, reinforcing market leadership position
- Customer deposits up 2% during the quarter, supporting stable funding position
- Net interest margin continues to face pressure from housing competition and deposit costs
- Non-performing exposures elevated at 1.39%, up 26bps year-on-year, indicating asset quality stress
- Productivity program targeting $400+ million in savings for FY2025
- Strong capital position maintained with CET1 ratio of 12.35%, supporting ongoing share buybacks
What's Changed?
- Business Momentum: Business lending growth remains resilient despite economic headwinds
- Margin Pressure: Competitive intensity in mortgage market showing no signs of abating
- Asset Quality: Early signs of stress emerging across both retail and business portfolios
- Digital Adoption: Digital onboarding increased to 72%, up from 62% four years ago
- Capital Management: Continuing $3 billion share buyback program while maintaining strong buffers
Executive Summary
National Australia Bank delivered a resilient performance in Q1 FY2025, maintaining business banking strength while navigating challenging conditions in the retail segment. The bank's strategic focus on business banking continues to provide partial insulation from intense competition in mortgages, with 8% business lending growth helping to offset margin pressure.
The bank maintained its disciplined approach to housing lending, growing below system average at 3% while prioritizing returns over volume. This strategy contributed to a 19.6% decline in Personal Banking earnings in FY2024, a trend that has shown early signs of stabilization in Q1 FY2025.
NAB's productivity program delivered $453 million in benefits during FY2024, and management has committed to savings exceeding $400 million in FY2025. These initiatives are critical for offsetting margin pressure and creating capacity for continued investment in digital capabilities.
The bank's strong capital position, with a CET1 ratio of 12.35%, provides flexibility for both shareholder returns and strategic investments. Management continues to execute its $3 billion share buyback program while maintaining dividends at 169 cents per share, representing a 4.7% yield at the current share price.
While emerging asset quality concerns warrant monitoring, NAB's prudent approach to provisioning and strong balance sheet position it well to weather potential economic challenges. The bank's focused execution of its strategic priorities, combined with its leading position in business banking, provides a solid foundation for gradual earnings recovery through FY2025 and beyond.
Financial Highlights
| Key Metric | Q1 2025 | Q4 2024 | Change |
|---|---|---|---|
| Cash Earnings (Quarterly) | $1,815m | $1,780m | +2.0% |
| Net Interest Margin | 1.70% | 1.71% | -1bp |
| Business Lending Growth (YoY) | 8.0% | 8.2% | -0.2pp |
| Housing Lending Growth (YoY) | 3.0% | 2.6% | +0.4pp |
| Customer Deposits (QoQ) | +2.0% | +1.1% | +0.9pp |
| CET1 Ratio | 12.20% | 12.35% | -15bps |
| Non-Performing Exposures/GLAs | 1.45% | 1.39% | +6bps |
| Productivity Benefits (YTD) | $105m | $453m (FY24) | n/a |
Segment Performance
| Segment | QoQ | Key Events |
|---|---|---|
| Business & Private Banking | +1.5% | Continued SME market leadership with maintained 8% business lending growth |
| Personal Banking | -0.8% | Subdued housing lending growth with ongoing margin pressure, though deposit growth strong at 2.5% |
| Corporate & Institutional | +0.3% | Stable performance with improved lending margins offset by lower Markets income |
| New Zealand Banking | +0.5% | Gradual improvement in housing market supporting modest growth despite challenging conditions |
Key Outlook Points
| Category | Current/Near-Term | Medium-Term | Long-Term |
|---|---|---|---|
| Earnings Growth | 🟨 2.3% (FY25 forecast) | 🟩 4-5% CAGR (FY26-27) | 🟩 Sustainable 3-4% growth |
| Dividends | 🟩 169-172 cents (4.7-4.8% yield) | 🟩 Progressive growth to 186c by FY27 | 🟩 Sustainable payout ratio 70-75% |
| Margin Pressure | 🟥 Ongoing compression in housing | 🟨 Stabilizing as rates normalize | 🟨 Structurally lower than historical levels |
| Asset Quality | 🟥 Deteriorating metrics (NPEs 1.45%) | 🟨 Peaking by end of FY25 | 🟩 Gradual improvement as economic conditions normalize |
| Business Banking | 🟩 Maintained leadership and growth | 🟩 Expanding specialized segment focus | 🟩 Continued competitive advantage |
| Digital Transformation | 🟩 Accelerating adoption rates | 🟩 Cost efficiencies materializing | 🟩 Enhanced customer experience driving loyalty |
Color Key: 🟩 Positive for the company 🟨 Neutral or moderate 🟥 Challenging or negative
Valuation Summary
Our analysis derives a base case valuation of $32.50 per share, representing 9.7% downside to the current price of $36.00. This valuation is primarily based on a modified Dividend Discount Model (DDM) methodology, which most appropriately captures the bank's dividend-centric business model and regulatory capital constraints.
| Methodology | Implied Price Per Share |
|---|---|
| DCF - Base Case | $32.50 |
| DCF - Bull Case | $39.75 |
| DCF - Bear Case | $23.50 |
| P/E Multiple - NTM | $33.18 |
| P/B Multiple | $32.00 |
| PEG Ratio (P/E to Growth) | $31.75 |
| Precedent Transactions | $31.00 |
| Implied Valuation Range | $30.00 - $38.00 |
| Current Share Price | $36.00 |
| Up/Downside to Base Case | -9.7% |
Our Bottom Line
National Australia Bank is successfully navigating challenging market conditions through its strong business banking franchise and disciplined execution of strategic priorities. The Q1 FY2025 update reinforces our view that the bank is stabilizing after FY2024's earnings decline, with potential for gradual improvement through productivity initiatives and sustained business banking growth.
While margin pressure and asset quality concerns persist, NAB's strong capital position and prudent provisioning provide resilience against economic uncertainties. The bank's strategic focus on business banking, particularly in the SME segment, offers distinctive positioning compared to peers and partial insulation from housing lending margin compression.
We believe the market is currently pricing NAB optimistically, reflecting the quality of its business banking franchise but leaving limited room for execution risk or economic deterioration. While we maintain a cautious near-term outlook with a target price below the current trading level, NAB continues to offer attractive dividend yield and reasonable long-term value for patient investors.
What to Watch
- Productivity Program: Progress toward $400+ million savings target for FY2025
- Net Interest Margin: Degree of further compression as competition continues and RBA begins rate cutting cycle
- Asset Quality Trends: Evolution of non-performing exposures and provisions as economic challenges persist
- Business Banking Growth: Sustainability of 8% growth rate amid economic headwinds
- Digital Transformation: Impact on customer acquisition, retention, and cost-to-income ratio
- Capital Management: Pace of share buybacks and approach to capital optimization
Project Timeline
Productivity & Simplification Program (Ongoing)
- Now: Delivered $453 million in benefits during FY2024
- FY2025: Targeting $400+ million in additional savings
- Impact: Critical for offsetting margin pressure and creating investment capacity
Digital Transformation (Ongoing)
- Now: Digital onboarding up from 62% to 72% over four years
- FY2025-26: Continued investment in automation and customer experience
- Impact: Improving efficiency while enhancing customer engagement
Capital Optimization (Ongoing)
- Now: CET1 ratio of 12.35%, above 11.0-11.5% target range
- FY2025-27: Gradual reduction toward upper end of target range
- Impact: Enhanced shareholder returns through dividends and buybacks
Regulatory Capital Framework Changes (Upcoming)
- October 2025: APRA's revised APS 117 Capital Adequacy effective
- January 2027: Proposed replacement of 1.5% AT1 capital
- Impact: Potential structural reset in return expectations
Tailwinds
Business Banking Leadership:
- Industry-leading position in SME segment with 8% growth maintained
- Specialized expertise in Agriculture, Health, and Professional Services
- Relationship-driven banking with higher switching costs than retail
- Higher margins and returns compared to commoditized mortgage lending
Productivity & Simplification:
- $453 million in benefits delivered in FY2024
- Targeting $400+ million additional savings in FY2025
- Digital adoption increasing, supporting cost efficiencies
- Pathway to positive jaws (revenue growth exceeding expense growth)
Strong Capital Position:
- CET1 ratio of 12.35%, well above 11.0-11.5% target range
- Flexibility for both shareholder returns and strategic investments
- $2.1 billion in share buybacks during FY2024, continuing in FY2025
- Supports 80% dividend payout ratio at top of target range
Geographic Diversification:
- New Zealand Banking providing portfolio diversification
- Some natural hedging against Australian economic cycles
- Opportunity for differentiated growth as conditions evolve differently across markets
Headwinds
Margin Compression:
- Net interest margin down 3 basis points to 1.71% in FY2024
- More severe compression in Business Banking (-21bps) and Personal Banking (-18bps)
- Competitive intensity in housing lending showing no signs of abating
- Deposit costs elevated with shift toward higher-yielding term products
Asset Quality Deterioration:
- Non-performing exposures up 26 basis points to 1.39% of gross loans
- Rising stress in both mortgage and business portfolios
- Individually assessed provisions increased 40.3% year-on-year
- Cost-of-living pressures and elevated interest rates impacting borrowers
Competitive Housing Market:
- Intense competition with compressed margins in mortgage lending
- NAB pursuing disciplined "sub-system" growth prioritizing returns over volume
- Personal Banking earnings declined 19.6% in FY2024
- Digital disruption enhancing price transparency and customer mobility
Regulatory Evolution:
- APRA's revised capital framework effective October 2025
- Increased loss-absorbing capacity requirements by January 2026
- Proposed AT1 capital structure changes from January 2027
- RBNZ capital review requiring higher Tier 1 and Total capital ratios by 2028
Discussion