Digital Disruption And Legacy IT Burdens Will Crush Margins

Key Takeaways

• Rising digital competition, legacy system costs, and slow transformation threaten market share, margins, and ability to deliver operational efficiencies.
  
• Exposure to property market shifts and demographic changes heightens credit risk, regulatory burdens, and long-term revenue pressure.
  
• Investments in technology, focus on business lending, strong risk management, and reliance on customer deposits position the bank for resilient, stable earnings growth.

Catalysts

Provides financial services to individuals and businesses in Australia, New Zealand, Europe, Asia, the United States, and internationally.

• National Australia Bank is poised to face intensifying digital disruption from both fintechs and large technology firms, which threatens to erode its core retail and business banking market share and compress margins over time, thereby constraining future revenue growth.
  
• The aging Australian population and resulting wealth shift are set to reduce the demand for traditional lending products, likely leading to persistent pressure on NAB's loan book expansion and overall revenue trajectory in coming years.
  
• Elevated exposure to the Australian housing market leaves NAB particularly vulnerable to a stagnating or declining property market, increasing the risk of higher credit losses and constraining earnings, especially as recent efforts to grow the proprietary home lending channel remain in early stages with uncertain sustainability.
  
• Ongoing costly investment in legacy IT and slow pace of digital transformation relative to agile new entrants may continue to weigh on expense lines, squeezing net margins and reducing operating leverage benefits the bank seeks to achieve.
  
• Sustained competitive and regulatory pressures are likely to keep net interest margins under downward pressure, while heightened compliance costs-from both stricter capital requirements and climate-related scrutiny-are expected to eat into profitability and threaten the sustainability of dividend payouts.

National Australia Bank Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on National Australia Bank compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming National Australia Bank's revenue will grow by 3.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 35.1% today to 31.9% in 3 years time.
• The bearish analysts expect earnings to reach A$7.1 billion (and earnings per share of A$2.23) by about August 2028, up from A$7.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.4x on those 2028 earnings, down from 18.7x today. This future PE is greater than the current PE for the AU Banks industry at 15.3x.
• Analysts expect the number of shares outstanding to decline by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.73%, as per the Simply Wall St company report.

National Australia Bank Future Earnings Per Share Growth

Risks

• Sustained investment in modernizing technology and digital platforms is driving operational efficiencies and customer experience improvements, which could translate into higher revenues and improved net margins over time.
  
• Continued focus on growing NAB's business banking franchise and successfully increasing market share in SME and agri lending positions the bank to benefit from secular economic growth and supports stable long-term earnings.
  
• Strong capital and liquidity metrics, including a CET1 ratio well above regulatory minimums, enable NAB to support profitable balance sheet growth and maintain a reliable dividend stream, underpinning earnings predictability.
  
• Prudent risk provisioning practices and a well-diversified, secured loan book mean that while asset quality may soften in the near term, NAB is well positioned to navigate credit cycles without significant adverse impacts on net earnings.
  
• Progress in deposit gathering-now funding 84% of lending with customer deposits-reduces reliance on volatile wholesale markets, strengthening net interest margins and supporting long-term revenue stability.

Valuation

• The assumed bearish price target for National Australia Bank is A$29.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of National Australia Bank's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$42.5, and the most bearish reporting a price target of just A$29.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$22.3 billion, earnings will come to A$7.1 billion, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of A$42.79, the bearish analyst price target of A$29.0 is 47.6% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.