Australia | Jul 19 2006
By Chris Shaw
National Australia Bank (NAB) yesterday briefed the market on the progress of its restructuring program in the UK, with most secutities analysts coming away with a positive view on developments to date.
GSJB Were notes the bank is now achieving growth in retail transaction volumes despite a smaller overall branch network, while expansion of its Integrated Financial Services operations is also proceeding according to expectations. As a result, it continues to rate the stock as Marketperform, L/T Buy.
The broker also remains positive on the outlook for the third party distribution model, as it notes it is continuing to attract the high net worth customers the bank has been targeting. This leaves the broker with the view the bank should be able to increase its Return On Equity (ROE) to around 20%, which would bring it in line with its peers on the Australian market. Such an outcome would support a valuation of about $40.00, compared to the broker’s current valuation of $37.43.
Deutsche Bank agrees, setting $40.00 as its target price as it continues to rate the stock as Buy. It sees the UK outlook now as robust, concluding it will now be a positive differentiator for the bank compared to its peers rather than a negative as had been the case.
It expects the UK operations will continue to make a larger contribution to group earnings as there should be further gains from cost cutting and higher transaction volumes, the broker estimating a doubling of profit from the division over the next three to five years is realistic.
Citigroup is similarly positive on the potential for UK earnings growth, suggesting FY07 will see the improvements begin to become apparent in earning terms. While not as bullish as Deutsche, the broker suggests the UK operations could grow profits by 20% over the next two to three years.
Its estimates are more conservative given it sees the potential for some softening in margins as well as a downturn in fee-based income, but with restructuring benefits still to flow through there is no change to its overall forecasts.
Credit Suisse is somewhat less positive, retaining its Neutral rating and share price target of $37.00. It suggests while the turnaround in the UK remains on track, there is as yet little evidence to support the view the operations should be retained in the longer-term.
The broker suggests while volume growth has been strong, some of this can be attributed to account transfers as the bank has poached staff from rivals, so there needs to be further confirmation the growth in volumes can be maintained in the longer-term. It also questions the long-term growth prospects of the Clydesdale Bank operations generally, suggesting they are modest and so do not justify the bank trading on a premium rating. On a positive note, the broker sees the potential for cost savings from the UK restructuring to come in somewhat higher than current guidance.
In contrast, ABN Amro supports the more positive outlook by suggesting the differentiation the UK assets offer the bank in contrast to the Australia/new Zealand focus of its rivals will become increasingly attractive, particularly as there remains the potential for bad debts from the UK operations to fall in FY07. The broker rates the stock as Buy and considers it the number one pick in the sector, with a price target of $41.22.
Overall, the FN Arena database shows opinions are still divided on the stock as there are three Buy ratings, six Neutral recommendations and one Underperform rating. The average target price is only $36.32, though this reflects the low target price of JP Morgan that accompanies its Underweight recommendation. By way of comparison, the median price target for the stock according to Thomson One Analytics is $38.00.
The last closing price for NAB shares was $33.92.