Daily ShareChat: National Australia Bank

National Australia Bank, which owns Bank of New Zealand, is facing pressure on interest margins from a combination of higher wholesale funding costs and tough competition in the retail term deposit sector which is pushing up the average cost of funds, says David Ellis, an analyst at Aegis Equities Research.

"Compounding the higher cost of funding is NAB's price-led strategy to grow business volumes and market share in consumer banking," Ellis says. "Market share in residential home loans has improved but the strategy comes at a cost of lower profitability."

He has pulled back his earnings-per-share forecast for the year ending September by 3.1% and his 2011 forecast by 6.8%.

"To reflect a more cautious outlook, we decrease hour forecast dividend payout ratio to 65% for 2011, reducing the expected dividend to A$1.68 (NZ$2.07) per share from $1.73. Nevertheless, Ellis has raised his longer-term growth assumptions and raised his valuation to A$30.80 a sahre from A$28.20 previously.

"NAB is well-positioned to leverage earnings as economic conditions continue to improve in Australia and eventually recover in New Zealand and the UK," he says. The bank has a strong franchise in Australia and New Zealand but remains sub-scale in Britain, he says.

Recommendation: Buy

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