National Australia Bank (ASX: NAB) is one of the largest publicly listed banks in Australia. NAB has a market capitalisation of A$46 billion.
Update on Coronavirus
The coronavirus (COVID-19) was first reported from the Wuhan province in China on 31 December 2019. The World Health Organisation data shows a total of confirmed cases of 292,142 and 12,787 deaths globally. As of today (23 March 2020), there have been over 1000 confirmed cases and 7 have died of COVID-19 in Australia.
What is the update on NAB’s share price?
In the last month, NAB’s share price has fallen by 42%. NAB is currently trading at around A$14.09, the lowest level since 1996.
What is NAB’s response to COVID-19?
NAB’s management notes that COVID-19 will continue to have a substantial negative effect on global and domestic economic activity. This, in turn, will have a material adverse impact NAB’s financial performance and position in the short-term. At this stage, NAB cannot quantify this impact and will update the market in May 2020 when NAB reports its HY20 results.
NAB welcomes the RBA’s measures released 19 March 2020, including the following. Firstly, setting the cash rate at 0.25% and targeting the 3-year government bond yield of 0.25%. Secondly, the RBA Funding Facility, which should help NAB make additional loans to small and medium sized businesses. Thirdly, the Coronavirus SME Guarantee, where the Government will provide a 50% Guarantee to lenders (such as NAB) to support new short-term unsecured loans to small to medium sized businesses. Finally, the new capital measures where APRA has temporarily reduced capital expectations for the banks.
All these measures should help NAB navigate through this uncertain economic environment. NAB’s management also notes that NAB has strong capital and liquidity positions.
In this respect, NAB also announced that 7.5 million of capital notes that were issued on 23 March 2015 will convert to 35.1 million ordinary shares with a conversion price of $21.34. This means that NAB raised Tier 1 equity capital of around $750 million.
What is the outlook for NAB and the other banks?
The short-term outlook for NAB is negative. The Australian economy is facing significant headwinds over the short-term and the loss in economic activity is negative for NAB’s profitability.
However, it is important to note that this environment does not only effect NAB. This economic environment will have adverse effects on all banks in Australia. The significant headwinds faced by the banking sector include the economic impacts of COVID-19, slow credit growth (also reflecting weak economic growth), pressures on net interest margins (which could lower profitability) and increased regulatory requirements flowing from the Hayne royal commission into financial services. That is, in the short term at least, all the Australian banks may have lower growth prospects than other sectors of the market and there is a significant risk that bank dividend payments could fall over the next year or so. That said, on the positive side, bank share prices, particularly NAB’s, are historically low and this could provide opportunities for investors.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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