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 MARKET REPORTS |
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Analyst report - shares
"Stock of the week": National Australia Bank
August 19, 2007
Tim Morris, Wise Owl analyst
Stock: National Australia Bank
Code: NAB
Sub-prime and liquidity concerns gripping the globe resulted in some ugly panic selling on the local bourse last week. Turbulent periods such as this are a great opportunity for long term investors to step in and pick up brand name blue chip stocks at bargain prices.
Aussie financial stocks, including the big four banks have been hit along with their US peers, on concerns about rising defaults and tightening liquidity. However the selling in the banks so far has been driven more so by fear than fact.
Presently, the liquidity squeeze has affected lenders that use short term debt to fund their lending activity, the cost of which has risen. However the traditional banks fund lending activity’s from their stable, low cost deposit bases, or by using long term debt, the cost of which has remained fairly stable. With their funding in check and default rates in the industry below historical averages, we view any exposure of the local banks to the sub prime fallout as having a limited impact on their overall profitability.
Should the US sub prime experience be a precursor for what’s install for the local mortgage market, the impact is likely to be limited; sub prime loans make up only 1% of the local mortgage market, compared to 15% in the US. This point was highlighted a few weeks ago by John Stewart, CEO of National Australia Bank (NAB), which is our pick of the banks.
NAB is currently 4 years into a turnaround program initiated by Stewart following the well publicised 2003 currency scandal. Although the fruits of this restructure are due to bear in 2008-09, the bank has already been making good progress increasing lending volumes and controlling costs. More than 50% of Australian revenues come from business lending and private banking, which has seen volumes grow at over 20% pa for the last 2 years. This segment has led the group, which in its last half year result saw revenues grow by 8.5% to $22.038b, and net profit up 7.1% to $2.136b.
Weighing on earnings for many years have been the bank’s UK operations, which have failed to attract market share despite strong discounting. However a recent restructure that focussed on the integration of the separate Yorkshire and Clydesdale brands have seen lending volumes expand at well above market rates. This long promised growth may finally permit the bank to gain a foothold in the UK market, allowing it to focus on profitability.
With growth showing on both the domestic and international fronts, the fundamentals remain sound, which combined with a return of market sentiment should reward shareholders over the long term.
More articles from this week's CompareShares newsletter:
Markets: Weathering the storm
Companies: Unloved offshore miners - part 2
Resident Trader: Running scared
International: Stronger Asia better able to deflect ripples
Credit: Eyes on central banks after US Fed move
US sub-prime: US recession on the cards
Markets: The fear spiral
Smart Investing: Tax takes shine off a great year
Stock of the week: NAB
Companies: Some transport worth catching
Software review: Amibroker
Tim Morris is an analyst at Wise-owl.com, one of Australia's leading independent stockmarket research houses.
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
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