Morningstar | NAB Turns a Corner with Appointment of Ross McEwan as CEO. A Positive for the Embattled Bank. See Updated Analyst Note from 18 Jul 2019
Wide-moat National Australia Bank looks to have turned a corner for the better, with the appointment of well-regarded Ross McEwan as CEO. McEwan is well suited to confront the challenges National Australia Bank faces, particularly a hostile regulatory environment and the rebuild of trust and confidence. McEwan’s experience at Royal Bank of Scotland, or RBS, and Commonwealth Bank of Australia makes him well suited to strengthen risk management, and substantially improve the bank’s culture, governance transparency and accountability. There is no change to our AUD 30 fair value estimate and at current prices the stock is fairly valued.We had expected current head of the bank’s consumer banking division, Mike Baird would be appointed CEO, but we can see the merit in McEwan’s appointment. We still think Baird would make an excellent CEO in the future. Despite our optimism, it will take several years to assess the success or otherwise of McEwan’s appointment. At this early stage we make no change to our earnings forecasts, as we already expect good progress with the bank’s transformation program delivering broadly flat costs in fiscal 2019 and 2020 allowing for notable items. He is due to start no later than April 2020 after resigning from RBS in April 2019.
McEwan certainly has deep experience at running troubled and complex banks. National Australia Bank’s history of disappointing shareholders is well known and based on Morningstar data, recent total shareholder returns have been disappointing. The bank has delivered total shareholder returns of 1.9% for 12 months and 1.5% per year for five years. But longer term the bank has delivered more impressive total shareholder returns of 8% per year for the past 10 years, underpinning our wide economic moat rating. The bank has experienced a tough couple of years with the disaster of the Royal Commission, resulting in the resignation of CEO Andrew Thorburn and the announced retirement of Chairman Dr. Ken Henry.
The appointments of Acting CEO and Chairman elect Phil Chronican and now the appointment of CEO elect Ross McEwan makes a powerful combination with both executives complementing each other. We like the appointment and can see good long-term upside to underlying performance, with the new CEO’s focus on delivering on the multiyear transformation project, extensive digitalisation of the bank, reducing costs, improving productivity and strengthening the business banking franchise. McEwan has considerable experience in the U.K. working in a hostile regulatory environment, dealing with a tough political situation and major and painful organisation restructuring. His experience and skills will be tested in the challenging post Royal Commission operating environment in Australia.
In addition to the regulatory and political challenges, National Australia Bank and major bank peers are facing tough operating conditions, with economic growth slowing, credit growth declining, margin pressure and home loan arrears rates slowly turning up. The RBA cash rate is at record lows of 1.00% with some expectation the benchmark could fall further, exerting even more pressure on net interest margins. McEwan needs to kickstart residential lending growth, improve customer service levels, deliver on a wide range of product innovation, improve branch productivity and ensure sector leading loan quality is maintained. The bank’s peer-leading business banking division needs to drive harder on sustainable and profitable growth initiatives, with particular focus on agriculture and health.
When CEO McEwan and Chairman Chronican eventually start in their respective roles, NAB will need to finalise plans for the embattled MLC wealth division. Current strategy is to demerge/sell the business to focus more on the highly profitable core business and consumer banking operations. However, as all four major banks are restructuring wealth operations, there may not be much demand for an underperforming, compliance-challenged integrated wealth business.
The bank is scheduled to release its third-quarter trading update on Aug. 14, 2019 and we expect an unaudited cash profit of approximately AUD 1.6 billion for the three months to June 30, 2019. Our above consensus full-year fiscal 2019 cash profit forecast of AUD 6.2 billion is unchanged as is our total fully franked dividend forecast of AUD 1.66 per share. Fiscal 2019 results are due on Nov. 7, 2019.
National Australia Bank provides banking services, credit and access card facilities, leasing, housing and general finance, international banking, investment banking, wealth management, funds management, life insurance and custodian, trustee and nominee services. Co.'s division include: Australian Banking, which provides products and services to retail and business customers; National Australia Bank Limited Wealth, which provides superannuation, investment and insurance solutions; and New Zealand Banking, which comprises the Retail, Business, Agribusiness, Corporate and Institutional and Insurance franchises in New Zealand. As of Sept 30 2016, Co. had total assets of A$777.62 billion.
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