National Australia Bank (NAB-AU)

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National Australia Bank Ltd. (ASX: NAB) is an international financial services organization providing advice, products, and services in Australia, New Zealand, Asia, the United Kingdom and the United States. The majority of NAB's operations are based in Australia with over 60 percent of its clients and employees coming from Australia. ^[1] NAB also operates in New Zealand under the Bank of New Zealand brand, in the UK through Clydesdale Bank and Yorkshire Bank brands and in the US under the Great Western brand.

Australia’s banking market is dominated by four major banks of which National Australia Bank Ltd. is the third.^[2] The three other banks are Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX:CBA) and Westpac Banking (ASX: WBC).

National Australia Bank Ltd. is involved in a variety of financial services but NAB's largest cash earnings have come from business banking ($2,193 million AUD FY2010) where NAB is also the largest competitor with 22.5 percent of business lending market share.^[3] Over the 17 months to August 2010, NAB increased business lending by a net $1.9 billion at a time when the industry contracted its lending by an aggregated $40 billion net. ^[4]

The Australian government is currently working to reform various parts of its financial services industry. On June 2, 2011 the Australian government announced it would reform the insolvency industry and banks remain nervous that regulation might affect future operations. ^[5]

Company Overview

National Australia Bank Ltd. began in 1858 as The National Bank of Australasia with its headquarters in Melbourne. The National Bank of Australasia quickly grew through the years and over the course of the early 20th century absorbed a number of other Australian banks. However, it was only in 1981 when The National Bank of Australasia merged with Commercial Banking Company of Sydney that it came to be known as The National Australia Bank. This merger not only changed the name of NAB but also allowed it to become an active player in international and domestic banking.^[6]

Business and Financial Metrics

Like most banks National Australia Bank Ltd. was adversely affected by the financial crisis of 2008/09, with dividends falling roughly 25 percent from 97 cents in 2008 to 73 cents in 2009.^[7] NAB was particularly affected (in comparison to other Australian banks) due to its active involvement in the US and UK banking and real estate sectors. This involvement led to shares falling 13.5 percent on July 24, 2008, which was NAB's biggest drop in 21 years. ^[8] However, NAB weathered the storm well and by September 30, 2010 cash earnings increased 19.3 percent to $4.58 billion AUD.^[9]

While the 2008 financial crisis was damaging for Australian banks it was much worse for other nations banking systems. As a result all four of Australians 'big four' banks entered into the top 20 global banks for the first time ever .^[10] NAB has used its strong performance through the financial crisis to expand operations by purchasing other companies. In 2009 NAB identified wealth management, insurance and its advisory business as key growth areas and acquired Aviva’s Australian division for $825 million to expand its wealth management options.^[11] NAB also acquired the mortgage management business of Challenger for $385 million (now known as Advantedge)^[12] and 80.1 percent of Goldman Sachs JBwere for $99 million to further expand its wealth management options.^[13]

Business Segments

National Australia Bank Ltd. consists of four banking segments which handle their various financial operations in Oceania, the UK, USA, and Asia.

Business Banking

• NAB is Australia’s largest business bank with over 22.5 percent of the business lending sector. Over the 17 months ending in August 2010 NAB grew its coverage of this sector from 21 to 22.5 percent by increasing lending by $1.9 billion while the industry overall contracted by $40 billion.^[14] In 2010 Business banking also provided cash earnings of $2,193 million, up 37.1 percent from last year.^[15]

Personal Banking

• Personal banking is a self-identified weakness for NAB.^[16] Over 2010 cash earnings decreased by 15.1 percent to $743 million.^[17] NAB is seeking to rebrand and reinvigorate its personal banking image and work on customer satisfaction approvals which stand at 74.7 percent, slightly below the industry average of 77.2 percent.^[18]

MLC and NAB Wealth: wealth management

• In an internal assessment, completed in 2009, NAB targeted wealth management as a high growth field and has consequently sought to expand operations through acquisitions.^[19] Consequently NAB now offers wealth management services through a variety of brands such as NAB Financial Planning, NAB Private Wealth, JBWere, Garvan, Apogee and Godfrey Pembroke. Acquisitions such as Aviva have helped NAB realize a cash earnings increase of 39.4 percent to $609 million and NAB plans to continue strong growth in this area by expanding the number of financial advisers it employs.^[20]

Wholesale Banking

• Wholesale banking was particularly hard hit by the financial crisis of 2008/09, over 2010 cash earnings fell by 38.6 percent to $705 million.^[21] This loss was in large part due to its large international holdings. The slow growth of UK and NZ businesses, in conjunction with the ongoing European sovereign debt crisis, led to large decreases in earnings.^[22]

International Banking

• UK: NAB operates in the United Kingdom under the Clydesdale and Yorkshire bank brands and has 2.7 million British customers.^[23] 2009 was a difficult year for British banks but 2010 saw strong growth for NAB with cash earnings increasing 53.2 percent to ₤118 million.^[24]

• NZ: NAB operates in New Zealand under the BNZ brand and is active in NZ retail banking, business, agribusiness, corporate and insurance with 1.2 million customers.^[25] 2010 saw slow growth for BNZ with cash earnings increasing only 1.4 percent to $524 million but customer deposits did increase by 9.7 percent.^[26]

• US: NAB operates in the United States under the Great Western Bank (GWB) brand and serves 400 000 customers.^[27] GWB expanded its operations by 72 branches this year through purchases of small bank chains in Iowa and Nebraska.^[28] This in addition to past acquisitions last year allowed GWB to announce cash earnings increases of 26.4 percent to $67 million.^[29]

• Asia: Due to Australia’s growing connection to Asian economies NAB has branched out into Asian operations. Current operations are small with 350 employees and 20 000 customers in Hong Kong, Singapore and Japan with NAB focusing on wholesale banking, business and institutional banking, and personal banking.^[30]

Key Trends and Forces

Australian Regulation

• Australia has always tightly regulated its banks, especially in regards to the big four. Due to the recent financial crisis and the big four’s increased domination of the market and influence on interest rates, Treasure Wayne Swan announced in December of 2010 a spat of new regulations.^[31] Concerns around regulation still remain high with a parliamentary report released in May 2011 calling for a broader inquiry into the banking sector and also the suggestion that barriers be lowered to allow the entrance of foreign banks to provide increased competition.^[32] Furthermore, NAB’s active involvement in superannuation through its increased wealth management sector has come at a time of potentially large government reforms in superannuation policy and regulatory practices.^[33]

Eurozone Sovereign Debt Crisis

• NAB’s international holdings expose NAB to a variety of risks and its large exposure in the UK through its operation of Clydesdale and Yorkshire Banks makes it particularly sensitive to the ongoing Eurozone Sovereign Debt crisis. In June of 2011 the downgrading of Greece's credit rating by Moody’s in addition to bleak global economic forecasts combined for shares to fall over 5 percent in one day.^[34] With uncertainties still abounding amongst the debt of other European Nations NAB’s UK holdings could lead to share price fluctuations. Such debt concerns have required NAB’s UK operations to increase liquidity holdings to mitigate risk exposure to the Eurozone sovereign debt crisis and consequently affected NAB's lending operations.^[35]

US Economic Climate

• While NAB’s US holdings are small as an overall proportion of assets, US banking has been a recently growing field with acquisitions occurring in both 2009 and 2010.^[36] Thus NAB's earnings are partially affected by the US economic climate. Short-term and long-term interest rates, inflation, variations in monetary supply, fluctuations in both debt and equity capital markets, and the strength of the United States will affect NAB's earnings.

Competition

National Australia Bank Ltd’s primary competition are the other three “big four” banks of Australia, but due to its international holdings NAB also competes with large banks in the US and UK. Within Australia NAB's major competitors are:

• Commonwealth Bank of Australia: the largest Australian bank in terms of both assets and deposits.^[37]

• Westpac Banking: the third largest Australian bank in terms of both assets and deposits.^[38]

• Australia and New Zealand Banking Group: the fourth largest Australian bank in terms of both assets and deposits.^[39]

References

1. ↑ [1] Annual Review 2010, page 26
2. ↑ http://www.theaustralian.com.au/business/news/big-four-join-global-elite/story-e6frg90f-1111118663656]
3. ↑ [2] Annual Review 2010, page 16
4. ↑ [3] Annual Review 2010, page 5
5. ↑ http://www.theaustralian.com.au/business/insolvency-sector-faces-major-reform/story-e6frg8zx-1226068253606]
6. ↑ [http://www.nab.com.au/wps/wcm/connect/nab/nab/home/About_Us/6/5/1/
7. ↑ [4] Annual Review 2010, page 4
8. ↑ [http://www.theage.com.au/business/nabs-7-billion-wipeout-20080725-3kwo.html
9. ↑ [5] Annual Review 2010, page 4
10. ↑ [http://www.theaustralian.com.au/business/news/big-four-join-global-elite/story-e6frg90f-1111118663656
11. ↑ http://www.money-au.com.au/finance-news/banking/nabs-aviva-wealth-management-acquisition-to-bring-scale-4815/]
12. ↑ http://www.investordaily.com/cps/rde/xchg/id/style/7760.htm?rdeCOQ=SID-0A3D9633-B8133BD4]
13. ↑ http://www.theaustralian.com.au/business/news/mixed-reviews-for-nabs-purchase-of-jbwere/story-e6frg90f-1225756083056]
14. ↑ [6] Annual Review 2010, page 16
15. ↑ [7] Annual Review 2010, page 16
16. ↑ [8] Annual Review 2010, page 4
17. ↑ [9] Annual Review 2010, page 18
18. ↑ [10] Annual Review 2010, page 18
19. ↑ http://www.money-au.com.au/finance-news/banking/nabs-aviva-wealth-management-acquisition-to-bring-scale-4815/]
20. ↑ [11] Annual Review 2010, page 18
21. ↑ [12] Annual Review 2010, page 20
22. ↑ [13] Annual Review 2010, page 20
23. ↑ [14] Annual Review 2010, page 21
24. ↑ [15] Annual Review 2010, page 21
25. ↑ [16] Annual Review 2010, page 22
26. ↑ [17] Annual Review 2010, page 22
27. ↑ [18] Annual Review 2010, page 23
28. ↑ [19] Annual Review 2010, page 23
29. ↑ [20] Annual Review 2010, page 23
30. ↑ [21] Annual Review 2010, page 23
31. ↑ http://www.reuters.com/article/2010/12/12/uk-australia-banks-factbox-idUKTRE6BB07U20101212]
32. ↑ http://www.gfsnews.com/article/1783/1/Aus_urged_to_ease_foreign_bank_barriers]
33. ↑ [22] Annual Review 2010, page 19
34. ↑ http://www.smh.com.au/business/nab-shares-dive-6-on-dividend-euro-blues-20110602-1fhj8.html
35. ↑ [23] Annual Review 2010, page 21
36. ↑ [24] Annual Review 2010, page 23
37. ↑ http://seekingalpha.com/article/158189-top-10-banks-of-australia-by-assets-and-deposits]
38. ↑ http://seekingalpha.com/article/158189-top-10-banks-of-australia-by-assets-and-deposits]
39. ↑ http://seekingalpha.com/article/158189-top-10-banks-of-australia-by-assets-and-deposits]