National Australia Bank: Eyes On Capital Return And Business Strategy (OTCMKTS:NAUBF)

Elevator Pitch

National Australia Bank Limited (OTCPK:NAUBF) (OTCPK:NABZY) [NAB:AU] stock is assigned a Hold investment rating. My previous February 28, 2024 write-up reviewed NAUBF’s Q1 FY 2024 (YE September 30, 2024) financial results.

I focus on National Australia Bank’s shareholder capital return and its strategy relating to the home loan business in this latest article.

The bank is deserving of a Hold rating. My view is that NABUF’s strategy of being less aggressive in the home lending market isn’t working, although I find the stock’s shareholder yield of 6.1% to be attractive.

The company’s shares can be bought or sold on the Over-The-Counter market and the Australian Securities Exchange. National Australia Bank’s OTC shares and Australia-listed shares boasted three-month average daily trading values of $0.6 million and $100 million (source: S&P Capital IQ), respectively. US stockbrokers such as Interactive Brokers provide trading services for Australian shares.

Shareholder Yield Is Appealing

National Australia Bank is returning a meaningful amount of capital to the company’s shareholders via share repurchases and dividend distributions.

On July 9, 2024, the bank issued an announcement disclosing that it has spent a cumulative AUD1.6 billion on share buybacks in the August 29, 2023-July 8, 2024 time period. In the same announcement, NAUBF highlighted that the company’s AUD3.0 billion share buyback program, which began in late August last year, is planned to be completed on May 1, 2025.

In other words, NAUBF is expected to repurchase approximately AUD1.4 billion worth of its own shares between now and the beginning of May next year. This translates into a buyback yield (share repurchases divided by market capitalization) of around 1.3%.

Separately, National Australia Bank paid out a semi-annual dividend per share of AUD0.084 for both 2H FY 2023 and 1H FY 2024. Assuming that the bank continues with the same amount of semi-annual dividend distributions for the future, the stock’s forward dividend yield is estimated to be 4.8%.

At the company’s 1H FY 2024 earnings call, NAUBF referred to its dividends as “sustainable”, and expressed confidence in being “able to generate excess capital over and above the dividend payout range.” This supports my assumption that National Australia Bank will pay out semi-annual dividends of at least AUD0.084 per share going forward.

To sum things up, National Australia Bank’s forward shareholder yield (sum of share buybacks and dividends divided by market capitalization) is projected to be an attractive 6.1% (1.3%+4.8%) as per my analysis. The enticing shareholder yield is the key positive for the stock.

Focus On Margin Has Led To Market Share Loss

National Australia Bank has prioritized net interest margin stability over market share preservation as part of the company’s business strategy.

NAUBF indicated at its 1H FY 2024 analyst call that “Australian housing lending has been a key source of industry margin pressure.” At the bank’s most recent results briefing, National Australia Bank emphasized that it has been “managing this impact through a disciplined and deliberate approach, which has seen us grow at an overall 0.9x system level over the 6 months to March.”

In other words, the bank is now content with growing in line with or even slightly slower than the overall home lending market. The company has decided to be less aggressive in competing in Australia’s mortgage market, so that its net interest margin won’t decline as much due to price competition.

But I don’t think that National Australia Bank’s strategy has paid off.

National Australia Bank has ceded significant ground to its rivals in the Australian mortgage market. A June 27, 2024 report (not publicly available) issued by Jefferies (JEF) titled “May ’24 Aggregates, Market Share & More” indicated that NAUBF’s share of the Australian home lending market shrunk by -6 basis points MoM (Month-on-Month) in May.

NAUBF’s home loan growth for the last three months up to May this year was a modest +0.5%. In contrast, its peers, Westpac Banking (OTCPK:WEBNF), ANZ Group (OTCPK:ANZGY) (OTCPK:ANZGF), and Commonwealth Bank of Australia (OTCPK:CBAUF) (OTCPK:CMWAY), registered relatively superior home loan growth rates at the high-single digit percentage level over the same three-month time frame, respectively.

On the other hand, National Australia Bank’s actual 1H FY 2024 net interest margin of 1.72% did beat the sell-side analysts’ consensus forecast by +3 basis points (source: S&P Capital IQ). But this still represented a -5 basis points contraction on a YoY basis.

More importantly, the bank’s earnings outlook is unfavorable. The market sees National Australia Bank’s net profit declining by -4.7% YoY and -4.2% YoY to AUD3,490 million and AUD3,401 million in 2H FY 2024 and 1H FY 2025, respectively, as per S&P Capital IQ data. I take the view that the narrower-than-expected net interest margin contraction is insufficient to offset the market share loss, which had led to expectations of a decrease in bottom line for NAUBF in future financial periods.

In summary, my opinion is that NAUBF’s strategy of being less aggressive in competing in the home loan market hasn’t worked.

Closing Thoughts

A Neutral view and Hold rating for National Australia Bank is justified, considering my assessment of its business strategy and shareholder capital return approach. The stock’s expected forward shareholder yield of 6.1% is attractive, but the company’s business strategy has resulted in meaningful market share loss and will likely hurt its future earnings.

I have valued National Australia Bank at 1.65 times P/B based on the Gordon Growth Model as per my February 28, 2024 update. The bank’s current P/B of 1.78 times (source: S&P Capital IQ) is less than 10% above my target P/B valuation metric, so I still think that National Australia Bank is fairly valued.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.