NAB overtakes Westpac, but CBA still light years ahead

NAB CEO Ross McEwan. Picture: Stuart McEvoy.

National Australia Bank has launched a successful stealth attack on its diminished rivals, inverting the major-bank rankings so that only Commonwealth Bank now lies ahead of it.

Last Monday, in a measure of how far Westpac has fallen, NAB displaced its floundering Sydney rival as the sector’s second most valuable lender, worth $65bn.

NAB’s Docklands neighbour ANZ suffered the same ignominy in July 2019, eight days before NAB announced it had snagged former Royal Bank of Scotland boss Ross McEwan as its new chief executive.

Of course, any stoush between NAB and the Commonwealth Bank juggernaut is a no-contest, with CBA’s $125bn market capitalisation exceeding the sum of Westpac and ANZ.

CBA’s long-term ascendancy is assured, and nothing chief executive Matt Comyn says at the first-quarter result on Wednesday will offer a glimmer of hope to his peers.

Morgan Stanley has forecast a 40 per cent rebound in cash profit for recurring businesses to $2.06bn, mainly due to lower loan losses after a $1.5bn overlay in the third quarter of the 2020 financial year.

The franchise is unassailable, performing better than its rivals with a superior risk profile because of its dominant home-lending business.

The only knock against CBA is that investors are paying too much for a premium stock, currently valued at a 35 per cent premium to its peers.

Unless Comyn pulls hard on the cost lever, joining ANZ chief Shayne Elliott in the absolute cost-reduction camp, it’s hard to see CBA shooting the lights out in a low-growth and low-interest rate environment.

As for NAB, it remains to be seen if the bank’s climb to No. 2 is an inflection point or a false dawn, because there’s been plenty of the latter over the last two decades.

Since 1998, NAB has reported $20bn in large, one-off items taken below the line – equivalent to 15 per cent of total profit.

McEwan is fond of portraying NAB’s business bank as one of only two leading franchises in the country, the other being CBA’s mortgage business.

Any lasting NAB resurgence depends on its ability to milk the group’s asset, which has defied predictions of a sharp rebound in business credit almost every year since the 2008-09 financial crisis.

If the economy does recover quickly, buoyed by good news overnight on Monday in relation to a COVID-19 vaccine, NAB could benefit from an earnings bounce.

It would mark the beginning of the long haul to bridging the CBA valuation gap.