Financial Analysis Of National Australian Bank: Share Prices, Recommendations, And Macroeconomic Factors

Share Price Analysis

The study will be based on the financial analysis of the National Australian Bank. The analysis of the financial performance will be carried on for National Australian Bank to understanding the movement in the share prices and provide the readers with the appropriate recommendations regarding the viability of making an investment in the stocks. A comprehensive evaluation of the financial performance will be performed which also accompany the shareholding structures and people that are involved in the corporate governance of the National Australian Bank.

Fundamental ratios will be calculated to for the past two years and movement along the graphs relating to the all ordinary index will be carried out to understanding the nature of movement in shares. The report would also look into the macroeconomic factors that creates an influence on the share prices of National Australian Bank. To further understand the capital structure of the company the CAPM model will be employed to derive the weighted average cost of capital that would be used as the base in choosing the rationale involved in making investment. The debt ratio and the dividend policy structure will be studied and a letter of recommendations would be accompanying relevant information for making an investment in National Australian Bank shares.

Description of Company:

National Australian Bank is regarded one four largest institutions in Australia based on the market capitalisation, customers base and earnings. National Australian Bank was placed as 21^st largest bank in world based on the measured market capitalisation (Nab.com.au 2018). National Australian Bank is ranked 41^st based on the total asset measured during the year 2014. As of November 2017 National Australian Bank operates around 1590 branches and services with approximately 4,412 ATM throughout Australia, New Zealand and Asian serving 12.7 million customers. National Australian Bank was created as the National Commercial Banking Corporation of Australia Ltd during the year 1982 upon the merger of National Bank of Australasia and the Commercial Banking Company of Sydney. As a result this, the bank was subsequently renamed as the National Australian Bank Ltd.

The bank witnessed the period of quick expansion as National Australian Bank bought several bank through acquisition with the acquisition of Home Side Lending which was one of the leading US based mortgage originator and service provider having base in Florida (Nab.com.au 2018). National Australian Bank launched during the year 2008 launched a brachless direct banking and traded separately as the U-Bank under the leadership of the Greg Sutherland and Gerd Schenket. The National Australian Bank during the year 2009 commenced a strategy of reputation change, management of wealth and placed larger emphasis on the domestic markets.  

Macroeconomic Factors

Ownership and structure of governance of the company:

Main Substantial Shareholders:

 As of 31^st October 2017, the Black Rock Group along with its associated companies formed the substantial shareholders of National Australian Bank. The Black Rock Group held more than 147,042,052 fully paid ordinary shares in the National Australian Bank that accounted for 10.23% of the total ordinary shares (Nab.com.au 2018). Based on the information it can be stated that National Australian Bank is a non-family based company.

 The other largest shareholders of the National Australian Bank is stated below;

Name of the Shareholders	Total Number of Shares	Percentage of Shares Held
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED)	638,988,106	23.79%
J P MORGAN NOMINEES AUSTRALIA LIMITED	319,495,521	11.90%
CITICORP NOMINEES PTY LIMITED	155,591,328	5.79%

 Based on the above stated shareholders information it can be stated that only one shareholder which is HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED) formed the largest shareholders of National Australian Bank as the HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED) held more than 20% of the shares of National Australian Bank (Nab.com.au 2018). There were only two shareholders that more than 5% of the total ordinary shares of National Australian Bank. This included the J P MORGAN NOMINEES AUSTRALIA LIMITED and the CITICORP NOMINEES PTY LIMITED with each holding 11.90% and 5.79% of the total number of shares. Based on the above shareholder classification an argument can be bought forward by stating that the National Australian Bank is non-family company with substantial portion of the shareholdings being held by Black Rock Group and its associates.

Main people involved in Company’s Governance:

The main people that are involved in the National Australian Bank governance are stated below;

Name	Total No. Of Fully Paid Ordinary Shares
KR Henry (Chairman	10,360
DH Armstrong	10,480
PW Chronican	31,000
PK Gupta	7,480
AJ Loveridge	10,000
GC McBride	5,960
DA McKay	10,000
AC Sherry	7,831
AG Thorburn	1,65,124
AKT Yuen	12,464
Senior executives
MB Baird	2,000
AJ Cahill	32,957
SJ Cook	2,000
AD Gall	93,269
AP Hagger	27,976
AJ Healy	44,642
GA Lennon	53,765
A Mentis	50,264
LN Murphy	34,072
PF Wright	2,000

 As evident from the above stated tabular representation it can be stated that none of the directors and the senior had more than 5% of the share holdings (Nab.com.au 2018). Therefore, an argument bought forward by stating that there no such presence of family members in the corporate governance of National Australian Bank.

Computation of Fundamental Ratios:

Short Term Solvency:

Table 1: Table Representing Solvency Ratios

(Source: As Created by Author)

Long Term Solvency:

Table 2: Table Representing Long Term Solvency Ratios

(Source: As Created by Author)

Asset Utilization: 

Table 3: Table Representing Asset Utilization Ratios

(Source: As Created by Author)

Profitability Ratios:

Table 4: Table Representing Profitability Ratios

(Source: As Created by Author)

Market Value Ratios:

Table 5: Table Representing Market Value Ratios

(Source: As Created by Author)

Graphical Descriptions of Results:

Movement in Monthly Share Price:

Figure 1: Figure Representing Movement in Share Price of National Australian Bank

(Source: As Created by Author)

Recommendations

Comparative Analysis of Movement in Share Price Index to All Ords Index:

As evident from the graphical representation it can be stated that the share price of the company has been relatively moderate with certain occasions of volatility being noticed. As understood the share price of the National Australian Bank has been in accordance with the all ordinary index (Gibbs et al. 2018). There have been instances during the month of December 2015 where the share price of National Australian Bank declined to stand at -8.41% while in the subsequent month of January 2016 the share price movement of National Australian Bank reflects further decline and stood negatively at -9.36.

Nevertheless, in the following month of February National Australian Bank posted a positive rise of 8.47 from the previous recorded downfall during the month of January (Radi? et al. 2018). It can be stated the three was very less volatility in the share price movement of National Australian Bank against the all ordinary index throughout the year of 2016 with share prices of the bank rising as high as 4.36% during the month of June 2016 (Simply Wall St 2018). Preceding to the following year of 2017 National Australian Bank reported a strong rise in the price of shares to stand positively at 5.47% while the all ordinary index stood 1.52%.

A significant decline in the share price was noticed during the month of April in 2017 when the prices of shares fell as low as -11.41 against the negatively standing all ordinary index of -3.17% (Alvesson and Robertson 2016). The financial year of 2017 reflects that the share prices of the National Australian Bank on certain occasion reported a negative decline against the all ordinary index. The year 2017 has witnessed a medium volatility in the share prices compared to the figures reported against the all ordinary index. Overall it can be stated on observing the share price movement of the National Australian Bank that there is an existence of moderate volatility in share price of the bank.  

Identifications of factors that influences the share price of the company:

There are certain factors that creates an impact on the share prices of the National Australian Bank. The “Macroeconomic factors” includes the economic demand for loans. The economic growth creates the demand for the loans and creates an impact on the ability of the borrower to repay that directly impacts the share prices and the higher level of risk undertaken by the National Australian Bank (Iannotta 2014). Following the consequences of the global financial crisis tighter lending practices by the National Australian Bank has resulted in more conservative lending’s. The macroeconomic factors suggest that the credit creation is going strong in Australia at a rate of 2.5% of the GDP. As a result this creates an influence in the share prices of the National Australian Bank. 

Conclusion

Another factor that create an influence in the share price of the National Australian Bank is the “changes in the company focus”. This includes an increased focus on the domestic mortgage market since the company has the reputation of working with the business (Wójcik, Knight and Pažitka 2017). The investors may opt for making an investment in the shares of National Australian Bank is primarily because of the rapidly growing business in Australia.

The “industry wide factors” include the National Australian Bank relation with the REA Group Ltd relating to the mortgage decision (Scott 2015). National Australian Bank has also created a relation with the Afterpay Touch Group Ltd that is generating large amount of growth in Australian and presently expanding in the foreign nations (Au.finance.yahoo.com 2018). The large number of the success of the National Australian Bank is reliant on the Australian economy and the housing market.  

The changes in the “management earnings forecast” also forms an important factor that create an influence in the share price of the National Australian Bank (Robson, Young and Power 2017). With stabilization in the loan funding costs and intensifying of the competition in the market of home loan the Chief executive of the National Australian Bank in his suggestion stated that he would cut down the rates of mortgage to synchronize with the central bank when the time appears to be appropriate. This resulted in 25 basis point fall in the share prices of National Australian Bank.        

Calculations of Beta and the Expected Rate of Returns using CAPM:

Computed Beta of the Company:

The calculated beta of the National Australian Bank stands 1.20.

Calculations of the required rate of Return using CAPM Model:

 Table 6: Table Representing the Required Rate of Return for National Australian Bank

(Source: As Created by Author)

Conservative Investment:

Concerning the conservative of making an investment in the shares of National Australian Bank it can be stated that the share prices of the National Australian Bank is lower than then was a year before (Macve 2015). The share prices of the National Australian Bank is presently 1 year low and with dividend yield of around 6.7% and the price earnings ratio of 13.4, the National Australian Bank is regarded as the best buy out among the Australian banks. The inevitable rise in the rates of the reserve bank of Australian would increase the National Australian Bank earnings and loans (Barillas and Shanken 2018). The rationale for making a conservative investment in the shares of National Australian Bank is that the share prices is below future cash flow value but not below the moderate discount of 20% and not below the substantial discount of 40%.

The National Australian Bank is regarded as the good value in terms of the earnings in comparison to the Australian market (Zabarankin, Pavlikov and Uryasev 2014). Additionally the earnings of the National Australian Bank has witnessed growth and it is anticipated to the go further than the low risk savings rate of 4.6%. Over the period of five years the National Australian Bank the annual earnings growth has been positive (Maynard 2017). Furthermore, the National Australian Bank has utilized its asset efficiently than the Australian banking industry with better return on assets. Therefore, the banks has low risk of dividend at the risk saving rate of 2.48% and the dividend of National Australian Bank is currently top among the market players.  

Computation of WACC:

Weighted Average Cost of Capital for National Australian Bank:

Table 7: Representing Weighted Average Cost of Capital for National Australian Bank

(Source: As Created by Author)

Explanation of WACC has on management evaluation of investment prospective:

When it is noticed that the WACC is on the higher side then there prevails a sign of greater risk associated to the functional operations of the organization (Warren and Jones 2018). Generally investors require higher amount of return to believe the existence of added sum of risks. The weighted average cost of capital turns out to be an important instrument in ascertaining the anticipated costs that is involved in the financing of the overall resources (Martin and Roychowdhury 2015). This generally comprises of the imbursement of a sum associated to the obligations of the debt or alternatively the costs that originates from the debt financing and the required rate of return that is obligatory in management ownership or cost associated in equity financing.

A large number of the listed companies usually has numerous funding sources. The WACC aims to strike balance in the relative costs of several resources so that a single cost of capital figure is generated (Hoyle, J.B., Schaefer and Doupnik 2015). In usual theory the weighted average cost of capital comprises of the expenditure engaged in raising an additional amount of money. Investors may voice their distress on finding that the WACC is on the higher side of the actual return (Barberis et al. 2015). This results in warning sign a firm may be losing out its worth. As a result the investors may not choose to invest when they find that a higher return is available in the somewhere else in the market.

Debt Ratio:

The debt ratio of National Australian Bank for both the financial year of 2016 and 2017 stood stable at 0.93. The management of the National Australian Bank believes that would be able to repay its debts (Henderson et al. 2015). The management to adjust its adjust the gearing ratio bought a change in the capital structure was reported by National Australian Bank as the bank transitioned to the revised level 2 group structure that created an immediate effect on the capital position of the company (Jegadeesh et al. 2016). The remaining amount of the debt originating from the debt issued directly by the national wealth management holdings were not any required. 

Dividend Policy:

The directors of National Australian Bank have declared a final dividend that stood 99 cents per share fully paid on the ordinary shares with 100% franked. The dividend policy of National Australian Bank states the company each year adjusts its dividend reinvestment plan to reflect the position of capital and outlook (Lee. and Parker 2014). The National Australian Bank offers its shareholders with 1.5 discount on the dividend reinvestment plan with no limit in participation.

Letter of Recommendations

To ABC

Adelaide, Australia

Respected Sir,

As evident from the above stated analysis we would like to draw your attention towards our letter that would be providing the recommendations for making investment in the shares of National Australian Bank. The present share price of the National Australian Bank is presently trading below the future cash flow but the share prices are not below the moderate discount of 20%. National Australian Bank is viewed as the better prospect of investment based on the earnings in comparison to the other Australian bank as the earnings of the bank is anticipated to go beyond the low risk savings rate of 2.48%.

The dividend paid by the National Australian Bank is presently at top in comparison to the other dividend payers in the market. A rise in the income of 6.93% is anticipated in the following year. Though the dividends per share have been on the volatile side over the last five years but simultaneously the dividend per share of National Australian Bank has increase in the last five years. The dividends paid by National Australian Bank is presently covered by its net profit.

Additionally, the bank has liabilities that are made up of lower risk funding sources with loans of the National Australian Bank is widely funded by the customer deposits. The level of assets for National Australian Bank comparatively moderate in respect to its equity. Bearing the mid the dividend that is paid by National Australian Bank, it is good prospect of making an investment.

We anticipate the recommendations provided have helped in better understanding of investment prospect in National Australian Bank.

Thank You

Conclusion:

A conclusion can be drawn by stating that share prices of the National Australian Bank is currently trading a below one year low but the bank is believed to have strong cash flow to meet its debts. From the perspective of investors the shares of bank is a good buy since it provides good value of earnings in the Australian market. The earnings growth though appears to be not above the Australian banking market average but it is in positive track and with low risk of savings rate the shares of the National Australian Bank is currently the good buy for the investors.

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