Changes in the Banking Sector – NAB and ANZ both look interesting

Altair asset portfolios have been underweight banks versus the market, however, a selection of our portfolios have been overweight NAB and ANZ. Since the beginning of this calendar year NAB and ANZ have outstripped CBA and WBC some three percentage points!
 Prior to the large fall over the last few weeks, we decreased our allocation to the bank sector over a gradual sell down that commenced 6 months ago. A good relative decision by the team. At this point, however, I feel the selling has been overdone and if you look at NAB by way of example (and I still prefer NAB and ANZ) on both an earnings yield and a dividend yield they are very interesting. I explain why in the following note:
Altair Asset Management

At today’s price NAB’s dividend yield is an 8.80% grossed up post franking credits and an earnings yield of 8.50%. This compares to a 1 year Commonwealth Government Bond's Yield to Maturity at just 2%. In addition, NAB’s earnings are tipped to grow at circa 3% to 5% over the next 3 years as a bonus.

NAB’s sale of the Greater Western Bank stake in the USA, the listing of the UK bank assets and the possible sale of most of the Insurance division for a mooted higher than market expected price are all favourable. In addition, post these assets sales the CET1 ratio – a measure of a bank’s core equity capital compared with its total risk-weighted assets – will be the highest for the banks at 9.5%, so it will be well capitalised. 

Possible negatives include the UK provisioning for conduct re Clydesdale Bank of 1.7bln GBP.  I feel some of this, however, will be clawed back and there may be a reasonable level of conservative over provisioning.
Valuing NAB post the announced and already transacted sales of non-performing and destructive businesses, I feel a higher multiple is appropriate to value the company.  Perhaps somewhere between the current higher premium multiples of the two larger home loan banks. We have recently added to our NAB position here due to its better cost-out, higher ROE story post the sale of its long term non performing foreign businesses.


Philip Parker, 
Executive Chairman

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Altair Asset Management
Altair Asset Management

Altair Asset Management (Altair) is a high conviction, active Australian equities manager whose investment philosophy is based on understanding the drivers and impact of change. Altair applies macro thematic research to uncover trends which are...


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