Australia | Feb 09 2007
By Chris Shaw
Yesterday National Australia Bank (NAB) held an institutional briefing to update on its nabCapital operations, which encompasses its wholesale banking division and where management is adopting a new strategy in an attempt to lift margins.
The strategy is coined an “originate-warehouse-distribution” model, the idea being the bank can recycle capital faster under such an approach and therefore boost returns. While the theory is good, broking analysts came away from the briefing with a rather “ho-hum” attitude, suggesting there was little in the presentation to drive market sentiment in the bank’s favour.
UBS, which rates the bank as Neutral 1, suggests the main issue with the briefing was the lack of detail as it focused more on the model itself and the culture needed to make it work. It, like JP Morgan, has been impressed with the operational turnaround achieved since 2004 but sees the division lagging group earnings growth going forward.
Merrill Lynch takes a similar view, as while it agrees the operation is now on a firm footing and has a clear strategic direction it is unlikely to be able to produce rapid earnings growth. JP Morgan echoed such a view, suggesting a flat earnings performance this year would actually be a good result but would likely disappoint the market, indicative of some potential downside risk to the share price. This fits the broker’s view, as its Underweight rating is matched by a price target of $35.82, well below the current market price.
The other issue raised by both ABN Amro and Credit Suisse is the bank’ shift to the “originate-wholesale-distribution” model is nothing different to what its competitors are doing, Credit Suisse suggesting the move is actually somewhat belated and leaves the bank behind its competitors in some respects.
ABN points out there is upside to earnings if the operations are leveraged correctly, but suggests much of this is already in the share price and so there is nothing to get too excited about.
Following the briefing there is no change in the FNArena database in terms of broker ratings on the bank, with National scoring Seven Hold ratings, two Buys and one Underweight. The average share price target is $41.03, which compares to a share price as at 12.05pm today of $41.28, up 26c.