NAB dividend concerns flagged

Deutsche has recommended a change to the local bank’s dividend policy.

Deutsche Bank has raised concerns about the sustainability of NAB’s dividend, suggesting a cut would be a “sensible” play.

Deutsche analyst Andrew Triggs said NAB’s recent moves to rid itself of long-term drags on profitability metrics — such as its life insurance unit and UK operations — would be beneficial in the long run but hid comparative underperformance to its rivals.

“NAB has earned praise and enjoyed a rerating for execution of its change agenda which has led to a more streamlined bank and an improved ROE,” he said.

“While we agree this should provide better financial outcomes for shareholders in future than in the past, in our view the improved ROE is a misleading indicator of NAB’s organic capital generation capacity.”

Mr Triggs believes return on tier one capital is the key metric to watch, tipping NAB’s will drop to 17 per cent in FY2017, from 19.6 per cent in the first half of FY2016.

This leaves it trailing Deutsche’s projections of its rivals, with ANZ tipped for an 18 per cent return, Westpac 21 per cent and Commonwealth Bank 22 per cent.

Based on return on tier 1 capital estimates, Deutsche believes a sustainable payout ratio for NAB would be between 71 per cent and 74 per cent.

This falls well shy of the 79 per cent payout ratio recorded in the first-half and the 81 per cent payout ratio in Deutsche’s current FY2017 forecast for the bank.

“While management are holding firm on maintaining the dividend at least at current levels, we see little room for error,” Mr Triggs said.

The comments come amid intense focus on the yield value of the big banks, with low interest rates driving investor interest in shares that are offering dividend yields of around 7 per cent.

NAB offers the highest fully franked yield of the big banks at around 7.5 per cent, with questions being asked whether it will follow ANZ in reducing its dividend when it reports full-year earnings later this year.

Despite the concerns outlined in the Deutsche note, Mr Triggs retained a ‘hold’ rating on NAB stock and a $28.70 price target.

At 1pm (AEST), NAB shares traded down 0.57 per cent at $26.32, outperforming its big four rivals which were off around 1 per cent.