national australia bank (nab)...page 4 national australia bank (nab) 8 december 2015 note there is...

8 December 2015

National Australia Bank (NAB)

Last night of the Proms

Recommendation

Buy (unchanged) Price

$29.31 Target (12 months)

$33.50 (previously $35.50)

Analyst

TS Lim 612 8224 2810

Authorisation

Chris Savage 612 8224 2835

Expected Return

Capital growth 14.3%

Dividend yield 6.7%

Total expected return 21.0%

Company Data & Ratios

Enterprise value n/m

Market cap $76,971m

Issued capital 2,626m

Free float 100%

Avg. daily val. (52wk) $213.7m

12 month price range $27.51 - $39.15

GICS sector

Banks

Price Performance

BELL POTTER SECURITIES LIMITED ACN 25 006 390 7721 AFSL 243480

DISCLAIMER AND DISCLOSURES THIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 12 THAT FORM PART OF IT.

(1m) (3m) (12m)

Price (A$) 30.10 30.40 31.93

Absolute (%) -1.79 -2.76 -7.43

Rel market (%) -0.23 -4.08 -5.36

UK demerger and IPO on track

NAB reaffirmed its intention to demerge and IPO the holding company for Clydesdale

Bank PLC (CYBG PLC) by early February. The Scheme Meeting and General

Meeting will be held in January 2016 and eligible NAB shareholders will receive one

CYBG security for every four NAB shares owned. While there is the potential for a

significant accounting loss following separation (depending upon the final Price/NTA

multiple for CYBG shares and difference to book value), this would not impact NAB’s

cash NPAT, CET1 capital nor its dividend paying capacity. Regardless, the UK exit

should finally return NAB’s focus onto the more profitable Australian and New Zealand

banking franchise. This follows the recent sale of 80% of its life insurance business

and exits from North America, legacy UK Commercial Real Estate and Specialised

Group Asset portfolios. The CYBG demerger and IPO should enable NAB to fully

close the ROE gap with its peers and ensure a positive re-rating in due course.

If not now, when?

There is currently a window of opportunity for NAB to extract better terms for its UK

demerger and IPO. In addition to improved CYBG fundamentals, the UK banking

sector has also seen a period of sustained recovery and re-rating since the GFC. The

national outlook remains positive at the macroeconomic level – based on strong GDP

forecast growth in excess of those of its key European peers, buoyant housing market,

low unemployment and a low inflation and interest rate environment.

Price target rebased to $33.50, Buy rating maintained

Our earnings estimates are largely unchanged as CYBG contributions are already

excluded. However, we have rebased NAB’s book value in anticipation of separation

(in line with management’s pro-forma adjustment of -$5.6bn to $49.9bn) and updated

the number of ordinary shares on issue. As the price target is partially based on a

multiple of book value, it is lowered to $33.50 (previously $35.50). The Buy rating is

maintained as NAB is nearing the completion of its strategic turnaround.

Absolute Price Earnings Forecast

Year end 30 September 2015 (pf) 2016e 2017e 2018e

NPAT (reported) (A$m) 6,885 5,462 7,045 7,545

NPAT (adjusted) (A$m) 6,457 6,532 6,985 7,485

EPS (adjusted) (A¢ps) 258 245 257 273

EPS growth (%) 14% -5% 5% 6%

PER (x) 11.3 12.0 11.4 10.7

P/Book (x) 1.5 1.5 1.4 1.4

P/NTA (x) 1.8 1.7 1.6 1.5

Dividend (A¢ps) 198 198 200 204

Yield (%) 6.7% 6.7% 6.8% 6.9%

ROE (%) 14.2% 14.1% 14.5% 14.7%

NIM (%) 1.82% 1.81% 1.80% 1.79%

Franking (%) 100% 100% 100% 100%

SOURCE: IRESS SOURCE: BELL POTTER SECURITIES ESTIMATES

$26

$28

$30

$32

$34

$36

$38

$40

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13

Mar

14

Jun

14

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14

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14

Mar

15

Jun

15

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NAB S&P 300 Rebased

National Australia Bank (NAB) 8 December 2015

Last night of the Proms

UK demerger and IPO on track

NAB has released the Scheme Booklet for its proposed demerger and IPO of the holding

company for Clydesdale Bank Group PLC (CYBG PLC). The proposal will be subject to

approvals from various parties including the courts, regulatory authorities – we understand

these are largely completed – and shareholders. In terms of the latter, the Scheme

Meeting and General Meeting will be held on Wednesday 27 January 2016.

Figure 1 – Normal trading expected in February 2016

SOURCE: COMPANY DATA

The proposal involves demerging 75% of CYBG shares to existing NAB shareholders and

selling the remainder by IPO to institutional shareholders, with commencement of normal

trading in early February 2016. The institutional offer is primarily designed to support the

development of an active and liquid market in CYBG shares and broaden the investor

base. While a trade sale of CYBG would have been preferable, no proposal with terms

and conditions acceptable to NAB has emerged.

Figure 2 – Achieves immediate UK exit and focus on Australia and New Zealand



If the demerger and IPO proposal is approved, eligible NAB shareholders will receive one

CYBG security for every four NAB shares owned. Primary listing will be on the London

Stock Exchange (LSE) and fully fungible CHESS Depositary Interests (CDI) will be listed

on the ASX (CYBG should qualify for FTSE 250, CDI should qualify for FTSE 250 and

ASX100). Selling shareholders will receive the proceeds of the sale of CYBG securities

free of brokerage and stamp duty costs but will not be entitled to CGT discount.

For the proposal to proceed, the UK Prudential Regulation Authority (PRA) required GBP

1.7bn capital support from NAB for contingent mis-selling costs (under a severe stress

scenario). The GBP465m provisions in 2H15 (within guidance of GBP350-500m) form part

of the total capital support. Total coverage for future CYBG legacy conduct issues

currently stands at GBP2.1bn, comprising GBP1.0bn unused provisions and GBP1.1bn

remaining capped indemnity amount. Future losses under the arrangement would be

shared 90.3%/10.7% between NAB and CYBG.

The impact on NAB is highlighted below with the primary benefits being ROE uplift towards

15% and a more competitive financial positioning relative to the major bank peers.

Figure 3 – Benefits of de-risking 1


Figure 4 – Benefits of de-risking 2



Note there is the potential for a significant accounting loss following separation. This is

related to the difference between the value of CYBG shares post IPO and book value.

Depending upon a range of Price/NTA multiples (0.5-1.0 times) and the cross-rate, the

illustrative loss including transaction costs and FCTR loss is estimated at $1.7-4.7bn.

However, the loss is a non-cash item with no impact on cash NPAT, CET1 capital and

NAB’s dividend paying capacity (target payout maintained at 70-75%). NAB’s CET1

capital ratio adjusted for 2016 impacts would be 9.45% vs. the target range of 8.75-9.25%.

Figure 5 – Accounting loss scenarios: No impact on cash NPAT


The UK exit should finally return NAB’s focus onto the more profitable Australian and New

Zealand banking franchise. This follows the sale of 80% of its life insurance business to

Nippon Life, successful exit from North America (Great Western Bank) and resolution of

legacy UK Commercial Real Estate and Specialised Group Asset portfolios. The UK

demerger and IPO should also reduce Group risk and complexity and enable NAB to close

the ROE gap with its peers (i.e. towards 15% that we now consider as the new normal).

Our Group forecasts already exclude CYBG and will next be reassessed at the half-year

mark. Completion of NAB’s de-risking game plan in addition to strengthened capital,

funding and liquidity positions should lead to a positive re-rating in our view.

Figure 6 – Target dividend payout ratio maintained at 70-75%



If not now, when?

CYBG (including Yorkshire Bank) is a full service mid-sized UK Retail and SME regional

bank with strong local community brands and engagement. It was established in 1838 in

Glasgow and became a member of NAB Group in 1987. CYBG operates through 275

branches (of which Yorkshire has 154) and 40 Business & Private Banking Centres mainly

in Scotland, northern England (North East, North West and Yorkshire and the Humber) and

the Midlands. Operations in the South East and London are largely confined to business

and private banking activities. CYBG’s operating regions remain attractive given a

combined population base of ~21m, sustained increase in average earnings in line with an

improving national economy and greater upside for house prices relative to London.

Figure 7 – CYBG snapshot


CYBG has around 2.8m customers, ~GBP29bn customer loans and ~GBP26bn customer

deposits with strong core region market shares as follow: Business Banking 14%; Personal

Current Account 9%; Business Lending 8%; and Mortgages 4% (all considered to be

sufficient for operating scale in our view). CYBG represents a leading differentiated

proposition relative to the other UK challenger banks, capitalising on service and quality,

scale in its niche segments, selected retail and SME capabilities, experience in the

intermediary channel and regional brand loyalty.

Figure 8 – Niche UK regional player



CYBG has seen significant transformation since 2012, having increased the proportion of

its retail secured lending book from 46% to 71% of total lending (while the retail unsecured

component remains small at 5%) and its customer funding from 70% to 84% in 2015. The

business lending component is now 25% of total lending following the divestment of its

commercial real estate book after the GFC. De-risking has resulted in an improved NPL

ratio of 1.4% (vs. 2.5% in 2012), a much lower BDD charge of around 21bp (vs. 74bp in

2012) and capital resilience (leverage ratio very strong at 7.1% vs. 4.6% in 2012, CET1

capital ratio 13.2% vs. 7.7% in 2012). Total coverage for future legacy conduct issues on a

severe stress scenario as mentioned earlier currently stands at GBP2.1bn, comprising

GBP1.0bn unused provisions and GBP1.1bn remaining capped indemnity. While FCA

consultation on time barring would provide a floor under these issues and PPI complaints

are in decline since 2012, the impact of Plevin is still unclear at this stage.

Figure 9 – Provisions for future legacy conduct costs based on severe stress scenario


The other major benefit of de-risking relates to restored underlying profitability. Underlying

profit may have declined by 28% to GBP159m but NIM is now considered more stable

without the commercial real estate book at 2.20%. Over a longer period, ROTE has

increased from 0.5% in 2012 to 5.1% in 2015 (and the cost-to-income ratio has reduced

from 77% to 75% over the same period and with further efficiency gains to come).

Figure 10 – Stabilising the drivers



The transformation suggests CYBG has largely gone back to its building society roots in

retail banking but with a stronger retail funding base and a much more compelling SME

and business banking offering. The five year outlook includes CET1 capital ratio range of

12-13%, stable NIM and a cost-to-income ratio of less than 60% (more details will be

released when the UK prospectus comes out in January 2016).

There is currently a window of opportunity for NAB to extract better terms for its proposed

demerger and IPO. In addition to improved CYBG fundamentals, the UK banking sector

has also seen a period of sustained recovery since the GFC. The national outlook remains

positive at the macroeconomic level – based on a combination of strong GDP forecast

growth in excess of those of its key European peers, buoyant housing market, low

unemployment and a low inflation and interest rate environment.

Figure 11 – Environment supportive of sector growth


Figure 12 – Positive momentum in retail and SME



Price target rebased to $33.50, Buy rating maintained

Our earnings estimates are largely unchanged as CYBG contributions are already

excluded. However, we have rebased NAB’s book value in anticipation of separation (in

line with management’s pro-forma adjustment of -$5.6bn to $49.9bn) and updated the

number of ordinary shares on issue. As the price target is partially based on a multiple of

book value, it is lowered to $33.50 (previously $35.50). The Buy rating is maintained as

NAB is nearing the completion of its strategic turnaround.

Table 1 – Estimate changes

SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

Table 2 – NAB SOP valuation Table 3 – NAB composite valuation

SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

NAB 2016e 2017e 2018e 2019e

Y/e September 30 ($m) Current Previous Change Current Previous Change Current Previous Change Current Previous Change

Profit & Loss

Net interest income 13,213 13,251 0% 13,884 13,922 0% 14,577 14,615 0% 15,310 15,348 0%

Other income 4,761 4,761 0% 5,045 5,045 0% 5,346 5,346 0% 5,669 5,669 0%

Total operating income 17,974 18,012 0% 18,929 18,967 0% 19,923 19,961 0% 20,979 21,017 0%

Operating expenses -7,634 -7,634 0% -7,823 -7,823 0% -7,951 -7,951 0% -8,339 -8,339 0%

Impairment expenses -897 -897 0% -1,043 -1,043 0% -1,202 -1,202 0% -1,319 -1,319 0%

Net profit before income tax 9,443 9,481 0% 10,063 10,101 0% 10,771 10,809 0% 11,321 11,359 0%

Corporate tax expense -2,795 -2,806 0% -2,977 -2,988 0% -3,184 -3,196 0% -3,344 -3,356 0%

Distributions & other -117 -117 n/m -101 -101 n/m -101 -101 n/m -101 -101 n/m

NPAT (cash basis) 6,532 6,559 0% 6,985 7,012 0% 7,485 7,512 0% 7,876 7,902 0%

DPS (cps) 198 198 0% 200 200 0% 204 204 0% 210 210 0%

EPS (cash basis) (cps) 245 246 0% 257 258 0% 273 274 0% 284 285 0%

ROE 14.1% 11.7% 2.4% 14.5% 12.1% 2.4% 14.7% 12.3% 2.4% 14.6% 12.3% 2.3%

NIM 1.81% 1.83% -0.02% 1.80% 1.82% -0.02% 1.79% 1.81% -0.02% 1.78% 1.80% -0.02%

Cost ratio 42% 42% 0% 41% 41% 0% 40% 40% 0% 40% 40% 0%

Impairment expense as % of GLA 0.16% 0.16% 0.00% 0.18% 0.18% 0.00% 0.20% 0.20% 0.00% 0.21% 0.21% 0.00%

Sum-of-Parts (As Is)2017e

NPAT

Pros. PE

(times)Value ($m)

Per NAB

share

Australia Banking 5,656 12.0 67,876 $25.85

UK (as is) 0 0.0 0 $0.00

Wholesale (in Australia Banking) 0 0.0 0 $0.00

Wealth 496 12.0 5,954 $2.27

NZ 836 12.0 10,033 $3.82

Other including distributions -3 0.0 0 $0.00

Total 6,985 12.0 83,864 $31.93

Composite Valuation Value ($m)Per NAB

shareWeighting

Composite

value per

NAB share

DCF 86,657 $33.00 40% $13.20

Dividend yield (sustainable) 94,301 $35.91 40% $14.36

ROE (sustainable) 71,645 $27.28 10% $2.73

Sum-of-Parts 83,864 $31.93 10% $3.19

Total $33.48


National Australia Bank

Company description

NAB is an international financial services organisation providing a comprehensive range of

retail and wholesale banking and wealth management products and services. The bank

currently operates in Australia (with the NAB and MLC brands), NZ (BNZ brand), UK

(offering retail, business and corporate banking facilities through the Clydesdale and

Yorkshire banks – although the subject of de-merger and IPO process) and Americas

(through the agribusiness specialist although sub-scale Great Western Bank in South

Dakota – in IPO process).

Investment strategy

Longer term, we view NAB as a turnaround stock now focused on the lower risk, capital

efficient domestic financial services market space. Based on strong top line growth, cost

initiatives to generate positive “Jaws”, better investment grade corporate exposures than its

peers and earnings upside from NAB Wealth (when markets normalise), we believe NAB

will be able to sustain 15% ROE.

Valuation

Our price target is roughly based on a blend of DCF, sustainable dividend yield play,

sustainable ROE and fully de-risked SOP valuation weighted as follows (with a heavier

weighting on the former two as the bank de-risks its UK and US operations and normalises

its ROE outlook towards 15% in the long term).

Table 4 – NAB SOP valuation Table 5 – NAB composite valuation

SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

SWOT analysis

Strengths

1. Agribusiness and SME / commercial banking capabilities;

2. Highest proportion of investment grade exposures in the sector;

3. Well diversified geographically;

4. Management execution; and

5. Cost discipline and ROE focus.

Sum-of-Parts (As Is)2017e

NPAT

Pros. PE

(times)Value ($m)

Per NAB

share

Australia Banking 5,656 12.0 67,876 $25.85

UK (as is) 0 0.0 0 $0.00

Wholesale (in Australia Banking) 0 0.0 0 $0.00

Wealth 496 12.0 5,954 $2.27

NZ 836 12.0 10,033 $3.82

Other including distributions -3 0.0 0 $0.00

Total 6,985 12.0 83,864 $31.93

Composite Valuation Value ($m)Per NAB

shareWeighting

Composite

value per

NAB share

DCF 86,657 $33.00 40% $13.20

Dividend yield (sustainable) 94,301 $35.91 40% $14.36

ROE (sustainable) 71,645 $27.28 10% $2.73

Sum-of-Parts 83,864 $31.93 10% $3.19

Total $33.48


Weaknesses

1. NIM still soft in business lending; and

2. UK conduct issues (although potential costs now capped).

Opportunities

1. Further domestic banking and wealth management opportunities based on securing

alternate distribution strategies; and

2. Driving the Personal and Business Banking cost ratio to below 35%.

Threats

1. UK demerger and IPO delays;

2. Macroeconomic factors, e.g. unemployment and slowing credit growth;

3. Changes in regulatory environment, especially higher liquidity/capital/funding

constraints under proposed global regulatory reforms, and the potential capping of

funds management and advice fees that would crimp wealth management earnings

growth; and

4. Increased competition specifically from the majors and disruptors on the domestic

front in retail and wholesale banking and wealth management.

Sensitivities

Table 6 – NAB sensitivities

SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

Y/e September 30 2016e 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e

Sensitivities

Group NIM +10bp 512 541 571 603 636 671 707 746 786

- NPAT upside (cash basis) 7.8% 7.8% 7.6% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7%

- Price target upside $2.67 $2.64 $2.59 $2.60 $2.61 $2.62 $2.63 $2.63 $2.63

Group Loans +1% 40 43 46 49 51 54 56 59 62



Australian loans +1% 53 57 59 62 64 67 70 73 77



NZ loans +1% 8 8 9 9 10 10 11 11 12



Other income +1% 33 35 37 40 42 45 47 50 53



BDD +1% -6 -7 -8 -9 -10 -11 -12 -13 -13

- NPAT upside (cash basis) -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1%

- Price target upside -$0.03 -$0.04 -$0.04 -$0.04 -$0.04 -$0.04 -$0.04 -$0.04 -$0.04

Costs +1% -53 -55 -56 -58 -61 -64 -68 -71 -75

- NPAT upside (cash basis) -0.8% -0.8% -0.7% -0.7% -0.7% -0.7% -0.7% -0.7% -0.7%

- Price target upside -$0.28 -$0.27 -$0.25 -$0.25 -$0.25 -$0.25 -$0.25 -$0.25 -$0.25


National Australia Bank as at 8 December 2015

Recommendation Buy

Price $29.31

Target (12 months) $33.50

Table 7 – Financial summary

SOURCE: BELL POTTER SECURITIES ESTIMATES

National Australia Share Price (A$) 29.31As at 8-Dec-15 Market Cap (A$M) 76,971

PROFIT AND LOSS VALUATION DATA

Y/e September 30 ($m) 2014 (pf) 2015 (pf) 2016e 2017e 2018e Y/e September 30 2014 (pf) 2015 (pf) 2016e 2017e 2018eNet interest income 12,062 12,497 13,213 13,884 14,577 NPAT (cash basis) ($m) 5,401 6,457 6,532 6,985 7,485

Other banking income 3,305 3,422 3,518 3,702 3,895 EPS (statutory basis) (cps) 230 275 205 261 276

Total banking income 15,367 15,919 16,730 17,586 18,473 - Growth 1% 20% -26% 27% 6%

Funds management income 1,082 1,091 1,139 1,230 1,328 EPS (cash basis) (cps) 226 258 245 257 273

Insurance income 324 476 105 113 122 - Growth -8% 14% -5% 5% 6%

Total operating income 16,773 17,486 17,974 18,929 19,923 P / E ratio (times) 13.0 11.3 12.0 11.4 10.7

Operating expenses -7,992 -7,448 -7,634 -7,823 -7,951 P / Book ratio (times) 1.6 1.5 1.5 1.4 1.4

Impairment expenses -725 -749 -897 -1,043 -1,202 P / NTA ratio (times) 1.9 1.8 1.7 1.6 1.5

Net profit before income tax 8,056 9,289 9,443 10,063 10,771 Net DPS (cps) 198 198 198 200 204

Corporate tax expense -2,509 -2,676 -2,795 -2,977 -3,184 Yield 6.7% 6.7% 6.7% 6.8% 6.9%

Minority interests 0 0 0 0 0 Franking 100% 100% 100% 100% 100%

Investment experience 34 19 15 31 31 Payout (cash basis) 87% 76% 81% 77% 75%

Distributions & other -180 -175 -132 -132 -132

NPAT (cash basis) 5,401 6,457 6,532 6,985 7,485 CAPITAL ADEQUACYAdjustments 128 428 -1,070 60 60 Y/e September 30 2014 (pf) 2015 (pf) 2016e 2017e 2018eNPAT (statutory basis, continuing) 5,529 6,885 5,462 7,045 7,545 Risk weighted assets ($m) 367,652 350,300 404,364 425,559 448,238

Average risk weight 44% 41% 46% 46% 46%

CASHFLOW Tier 1 ratio 10.8% 12.1% 11.4% 11.4% 11.6%

Y/e September 30 ($m) 2014 (pf) 2015 (pf) 2016e 2017e 2018e Core Tier 1 ratio 8.6% 9.8% 9.5% 9.6% 9.8%

NPAT (cash basis) 5,401 6,457 6,532 6,985 7,485 Total capital ratio 12.2% 13.6% 12.7% 12.7% 12.8%

Equity ratio 5.4% 5.7% 5.6% 5.6% 5.6%

Increase in loans -16,542 -36,721 -26,083 -26,746 -28,495

Increase in other assets -51,483 28,689 -6,813 -19,082 -20,540 DIVISIONALCapital expenditure 41 448 -45 -47 -48 Y/e September 30 ($m) 2014 (pf) 2015 (pf) 2016e 2017e 2018e

Investing cashflow -67,984 -7,584 -32,941 -45,875 -49,084 Australian Banking

Net interest income 10,277 10,727 11,433 12,045 12,680

Increase in deposits & borrowings -19,856 23,369 25,048 27,252 29,447 Other income 2,640 2,681 2,665 2,828 3,002

Increase in other liabilities 91,755 -28,382 6,670 15,929 16,564 Total banking income 12,917 13,408 14,098 14,874 15,682

Equity raised 436 6,271 886 906 927 Operating expenses -5,267 -5,558 -5,711 -5,887 -6,155

Other -4,384 -9,739 -6,194 -5,198 -5,340 Impairment expenses -741 -665 -765 -906 -1,060

Financing cashflow 67,951 -8,481 26,409 38,889 41,599 Net profit before tax 6,909 7,185 7,622 8,081 8,466

Corporate tax expense -1,962 -2,074 -2,287 -2,424 -2,540

Net change in cash 5,368 -9,608 0 0 0 NPAT (cash basis) 4,947 5,111 5,336 5,656 5,926

Cash at end of period 41,034 31,426 31,426 31,426 31,426 Home loans 249,633 268,486 283,965 298,891 314,585

Other loans 174,096 190,400 201,461 212,137 223,366

BALANCE SHEET Deposits 299,197 320,410 343,817 368,932 395,877

Y/e September 30 ($m) 2014 (pf) 2015 (pf) 2016e 2017e 2018eCash and liquid assets 41,034 31,426 31,426 31,426 31,426 UK Banking

Divisional gross loans 481,097 520,795 549,463 577,268 606,841 Net interest income 0 0 0 0 0

Provisions -3,118 -3,520 -3,979 -4,180 -4,399 Other income 0 0 0 0 0

Other gross loans / inter div. -19,817 -22,392 -24,518 -25,376 -26,235 Total banking income 0 0 0 0 0

Other IEA 276,970 198,076 214,239 231,721 250,629 Operating expenses 0 0 0 0 0

Intangibles 7,720 6,774 6,774 6,774 6,774 Impairment expenses 0 0 0 0 0

PP&E 1,952 1,504 1,549 1,596 1,645 Net profit before tax 0 0 0 0 0

Insurance assets 85,032 89,350 80,000 81,600 83,232 Corporate tax expense 0 0 0 0 0

Other assets 12,431 58,318 58,318 58,318 58,318 NPAT (cash basis) 0 0 0 0 0

Total assets 883,301 880,331 913,272 959,147 1,008,231 Home loans 0 0 0 0 0

Other loans 0 0 0 0 0

Divisional deposits 338,660 362,029 387,077 414,329 443,776 Deposits 0 0 0 0 0

Other borrowings 393,940 362,320 368,990 384,919 401,484

Other liabilities 102,793 106,031 106,031 106,031 106,031 NAB Wealth

Total liabilities 835,393 830,380 862,098 905,279 951,291 Wealth management income 1,082 1,091 1,139 1,230 1,328

Insurance income 324 476 105 113 122

Ordinary share capital 24,049 31,334 32,220 33,126 34,053 Total operating income 1,406 1,567 1,244 1,343 1,450

Other equity instruments 4,331 3,317 3,317 3,317 3,317 Wealth management expense 0 0 0 0 0

Reserves -866 -5,662 -5,662 -5,662 -5,662 Other expenses -950 -941 -706 -706 -706

Retained profits 20,377 20,943 21,281 23,068 25,213 Net profit before tax 456 626 538 637 745

Minority interests 17 19 19 19 19 Corporate tax expense -125 -181 -145 -172 -201

Total shareholders' equity 47,908 49,951 51,175 53,868 56,940 Investment experience 34 19 15 31 31

NPAT (cash basis) 365 464 408 496 575

Total sh. equity & liabs. 883,301 880,331 913,272 959,147 1,008,231 FUA 158,052 170,952 184,628 199,398 215,350

WANOS - statutory (m) 2,330 2,439 2,602 2,652 2,683 NZ Banking

WANOS - cash (m) 2,387 2,498 2,664 2,714 2,745 Net interest income 1,382 1,504 1,542 1,601 1,659

Other income 449 434 456 478 498

PROFITABILITY RATIOS Total operating income 1,831 1,938 1,998 2,078 2,157

Y/e September 30 2014 (pf) 2015 (pf) 2016e 2017e 2018e Operating expenses -737 -766 -767 -780 -789

Return on assets 0.6% 0.7% 0.7% 0.7% 0.8% Impairment expenses -80 -124 -132 -137 -142

Return on equity 12.4% 14.2% 14.1% 14.5% 14.7% Net profit before tax 1,014 1,048 1,099 1,161 1,226

Leverage ratio 4.5% 4.8% 5.1% 5.1% 5.2% Corporate tax expense -276 -286 -308 -325 -343

Net interest margin 1.88% 1.82% 1.81% 1.80% 1.79% Minority interests 0 0 0 0 0

Cost / income ratio 48% 43% 42% 41% 40% Investment experience 0 0 0 0 0

Cost / average assets 0.92% 0.81% 0.85% 0.82% 0.80% NPAT (cash basis) 738 762 792 836 882

Growth in operating income -9% 4% 3% 5% 5% Loans 57,368 61,909 64,037 66,240 68,890

Growth in operating expenses -5% -7% 2% 2% 2% Deposits 39,463 41,619 43,259 45,397 47,899

Jaws -5% 11% n/m 3% 4% Other IBL 0 0 0 0 0

Effective tax rate 31% 29% 30% 30% 30%

ASSET QUALITYY/e September 30 2014 (pf) 2015 (pf) 2016e 2017e 2018eImpairment expense / GLA 0.15% 0.14% 0.16% 0.18% 0.20%

Impairment expense / RWA 0.20% 0.21% 0.22% 0.25% 0.27%

Total provisions ($m) 3,118 3,520 3,979 4,180 4,399

Total provisions / RWA 0.85% 1.00% 0.98% 0.98% 0.98%

Indiv ass prov / gross imp assets 33% 31% 31% 31% 31%

IBL / IEA 100% 105% 103% 103% 102%

Total provisions + GRCL / RWA 1.00% 0.99% 0.98% 0.98% 0.98%


Bell Potter Securities Limited ACN 25 006 390 7721

Level 38, Aurora Place 88 Phillip Street, Sydney 2000

Telephone +61 2 9255 7200 www.bellpotter.com.au

Recommendation structure

Buy: Expect >15% total return on a

12 month view. For stocks regarded

as ‘Speculative’ a return of >30% is

expected.

Hold: Expect total return between -5%

and 15% on a 12 month view

Sell: Expect <-5% total return on a

12 month view

Speculative Investments are either start-up

enterprises with nil or only prospective

operations or recently commenced

operations with only forecast cash flows, or

companies that have commenced

operations or have been in operation for

some time but have only forecast cash

flows and/or a stressed balance sheet.

Such investments may carry an

exceptionally high level of capital risk and

volatility of returns.

Research Team

Staff Member

TS Lim

Industrials

Sam Haddad

John O’Shea

Chris Savage

Jonathan Snape

Sam Byrnes

John Hester

Tanushree Jain

Financials

TS Lim

Lafitani Sotiriou

Resources

Peter Arden

David Coates

Quantitative

Tim Piper

Hamish Murray

Title/Sector

Head of Research

Industrials

Industrials

Industrials

Industrials

Industrials

Healthcare

Healthcare/Biotech

Banks/Regionals

Diversified

Resources

Resources

Associate Analyst

Associate Analyst

Phone

612 8224 2810

612 8224 2819

613 9235 1633

612 8224 2835

613 9235 1601

612 8224 2886

612 8224 2871

612 8224 2849

612 8224 2810

613 9235 1668

613 9235 1833

612 8224 2887

612 8224 2825

613 9256 8761

@bellpotter.com.au

tslim

shaddad

joshea

csavage

jsnape

sbyrnes

jhester

tnjain

tslim

lsotiriou

parden

dcoates

tpiper

hmurray

The following may affect your legal rights. Important Disclaimer:

This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. In Hong Kong this research is being distributed by Bell Potter Securities (HK) Limited which is licensed and regulated by the Securities and Futures Commission, Hong Kong. This is general investment advice only and does not constitute personal advice to any person. Because this document has been prepared without consideration of any specific client’s financial situation, particular needs and investment objectives (‘relevant personal circumstances’), a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the representative of such licensee, who has provided you with this report by arraignment with Bell Potter Securities Limited) should be made aware of your relevant personal circumstances and consulted before any investment decision is made on the basis of this document.

While this document is based on information from sources which are considered reliable, Bell Potter Securities Limited has not verified independently the information contained in the document and Bell Potter Securities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility for updating any advice, views opinions, or recommendations contained in this document or for correcting any error or omission which may become apparent after the document has been issued.

Except insofar as liability under any statute cannot be excluded. Bell Potter Securities Limited and its directors, employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person.

Disclosure of interest:

Bell Potter Securities Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting and management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests in the securities referred to in this document.

ANALYST CERTIFICATION Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to Bell Potter, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.

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