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National Australia Bank has been a notable improver among the major banks in the past few years, but lately there has been debate about whether this strong run can continue.<\/p>\n
This is reflected in its share price. Over three years, NAB shares have done pretty well compared with most rivals, but it has been the weakest of the big four since the start of this year, falling about 14 per cent over this period.<\/p>\n
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NAB\u2019s reputation with investors has improved under chief executive Ross McEwan.<\/span>Credit: <\/span>Elke Meitzel<\/cite><\/p>\n There are a few likely reasons for the share price fall, but a big one is that investors overestimated the bank\u2019s margins, and how much benefit NAB would extract from being the country\u2019s largest lender to small and medium enterprises.<\/p>\n NAB\u2019s business bank is known as its \u201ccrown jewel\u201d. Small-business loans are not only highly profitable for banks, it\u2019s also a market that\u2019s been growing faster than mortgages.<\/p>\n However, at its results in May, NAB margins fell short of the market\u2019s bullish expectations, prompting profit downgrades and a hefty share price fall.<\/p>\n So, how is the Melbourne-based NAB, led by chief executive Ross McEwan, placed to deal with a market outlook that is worsening for banks, as the economy slows and competition remains fierce?<\/p>\n Industry:<\/strong> Banking<\/p>\n Main products:<\/strong> Retail and commercial banking services<\/p>\n Key figures:<\/strong> Chief executive Ross McEwan and chairman Phil Chronican<\/p>\n How it started:<\/strong> Today\u2019s National Australia Bank is a product of the 1981 merger between National Bank of Australasia and the Commercial Banking Company of Sydney \u2013 both of which were established in the 19th century.<\/p>\n How it\u2019s going:<\/strong> Over the past decade, NAB\u2019s share price has fallen slightly, but in the era under McEwan its reputation with investors has improved. NAB overtook Westpac to become Australia\u2019s second-largest bank by market capitalisation in 2020.<\/p>\n Bull case: <\/strong>Barrenjoey analyst Jonathan Mott points out NAB\u2019s result last month included some positive numbers, including return on equity of 13.7 per cent, the highest in five years. Mott, who has an \u201coverweight\u201d rating on NAB, says the bank is well capitalised, revenue has been growing strongly, and impaired loans have stayed low.<\/p>\n The weak part, says Mott, was the sharper-than-expected contraction in NAB\u2019s net interest margin (funding costs compared with what it charges for loans).<\/p>\n Mott says NAB\u2019s business bank was a strong performer, and he believes this will set NAB aside from its rivals in the coming years. Some argue that lending to small and medium business is riskier than mortgages, and Mott acknowledges this risk but plays it down.<\/p>\n He says some business loans will inevitably go bad as the economy worsens, but he believes bad debts among households will also rise sharply if interest rates climb higher. \u201cWe believe this cycle is likely to be different to previous experiences,\u201d Mott says.<\/p>\n Bear case:<\/strong> UBS banking analyst John Storey says McEwan and the team have done well improving NAB, but he points to a few challenges facing the business. First, NAB has recently been increasing its mortgage portfolio at a slower pace than rivals, which the bank says it\u2019s doing because the returns are too low in home loans.<\/p>\n \u201cThey are certainly growing slower than the market, and they are losing market share. At some point in time it could present revenue headwinds,\u201d says Storey, who has a \u201csell\u201d rating.<\/p>\n Storey also says NAB is likely to face increasing competition in business lending, and its smaller retail deposit portfolio means it faces higher funding costs than Commonwealth Bank and Westpac.<\/p>\n Finally, he points out loans to small and medium-sized companies \u2013 NAB\u2019s sweet spot \u2013 could be more likely to result in bad debts as the economy slows. \u201cWe don\u2019t think some of these concerns are reflected in the share price,\u201d Storey says.<\/p>\n The Market Recap newsletter is a wrap of the day\u2019s trading. <\/i><\/b>Get it each weekday afternoon<\/i><\/b>.<\/i><\/b><\/p>\nMost Viewed in Business<\/h2>\n
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