National Australia Bank Ltd (ASX: NAB) shares will be on watch today after the major bank reported its FY20 result.
NAB’s FY20 result
NAB reported that its cash earnings were down 36.6% to $3.71 billion compared to FY19.
The bank had a number of notable items including customer related remediation from the Hayne Royal Commission, payroll remediation, capitalised software policy changes and impairments of property related assets.
Excluding those large notable items of around $1 billion (net), cash earnings were down by 25.9% to $4.73 billion.
The statutory net profit came in at $2.56 billion.
Looking at the operating performance, excluding customer remediation, revenue was down 1.5% with lower fees due to COVID-19 fee waivers and reduced transaction volumes in merchant acquiring and card activities. Excluding notable items, expenses were up 2%.
NAB’s net interest margin (NIM) – which is a key bank profitability measure telling investors how much money it’s making on the money it’s lending out – declined 1 basis point (0.01%) to 1.77%.
Is NAB’s loan book holding up?
NAB said that its credit impairment charges increased 201% to $2.76 billion. As a percentage of total loans and acceptances, it rose 31 basis points (0.31%) to 0.46%. This included $1.86 billion of provisions for potential COVID-19 impacts and $388 million for targeted sectors experiencing elevated risk including aviation, tourism and so on.
The ratio of 90+ days past due and gross impaired assets to gross loans and acceptances increased by 10 basis points to 1.03% largely due to rising delinquencies in the Australian home loan portfolio where customers are not part of the COVID-19 deferral program. Those on payment deferrals are counted as performing. NAB said that asset quality is starting to deteriorate.
Even so, NAB finished the financial year with a common equity tier 1 (CET1) capital ratio of 11.47%, which was comfortably above the ‘unquestionably strong’ benchmark.
NAB dividend
The NAB board declared a final dividend of $0.30 per share, bringing the full year dividend to $0.60 per share. That represents a cut of 64% compared to FY19 (which was a cut from FY18).
This dividend represented 49.8% of continuing operations statutory earnings, which is essentially the maximum it could pay under APRA’s dividend guidance.
Summary thoughts
NAB is expecting “modest” expense growth in FY21 of up to 2% as it continues to invest in the business.
However, it seems clear that the loan book is getting worse rather than better, even excluding those payment deferrals. I don’t think the banks are through the worst of it yet. That’s why I prefer other ASX dividend shares like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) which may be much more reliable.