Financial Analysis of the National Australian Bank

Running head: FINANCE FOR BUSINESS
Finance for Business
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Table of Contents
Introduction:...............................................................................................................................2
Description of Company:...........................................................................................................2
Ownership and structure of governance of the company:..........................................................3
Main Substantial Shareholders:..............................................................................................3
Main people involved in Company’s Governance:................................................................4
Computation of Fundamental Ratios:........................................................................................5
Short Term Solvency:............................................................................................................5
Long Term Solvency:.............................................................................................................6
Asset Utilization:....................................................................................................................6
Profitability Ratios:................................................................................................................7
Market Value Ratios:.................................................................................................................7
Graphical Descriptions of Results:.............................................................................................8
Movement in Monthly Share Price:.......................................................................................8
Comparative Analysis of Movement in Share Price Index to All Ords Index:..........................8
Identifications of factors that influences the share price of the company:.................................9
Calculations of Beta and the Expected Rate of Returns using CAPM:...................................10
Computed Beta of the Company:.........................................................................................10
Calculations of the required rate of Return using CAPM Model:.......................................11
Conservative Investment:.....................................................................................................11
Computation of WACC:..........................................................................................................12

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Weighted Average Cost of Capital for National Australian Bank:......................................12
Explanation of WACC has on management evaluation of investment prospective:...........13
Debt Ratio:...............................................................................................................................13
Dividend Policy:.......................................................................................................................14
Letter of Recommendations.....................................................................................................14
Conclusion:..............................................................................................................................15
Reference List:.........................................................................................................................16

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Introduction:
The study will be based on the financial analysis of the National Australian Bank. The
analysis of the financial performance will be carried on for National Australian Bank to
understanding the movement in the share prices and provide the readers with the appropriate
recommendations regarding the viability of making an investment in the stocks. A
comprehensive evaluation of the financial performance will be performed which also
accompany the shareholding structures and people that are involved in the corporate
governance of the National Australian Bank.
Fundamental ratios will be calculated to for the past two years and movement along
the graphs relating to the all ordinary index will be carried out to understanding the nature of
movement in shares. The report would also look into the macroeconomic factors that creates
an influence on the share prices of National Australian Bank. To further understand the
capital structure of the company the CAPM model will be employed to derive the weighted
average cost of capital that would be used as the base in choosing the rationale involved in
making investment. The debt ratio and the dividend policy structure will be studied and a
letter of recommendations would be accompanying relevant information for making an
investment in National Australian Bank shares.
Description of Company:
National Australian Bank is regarded one four largest institutions in Australia based
on the market capitalisation, customers base and earnings. National Australian Bank was
placed as 21st largest bank in world based on the measured market capitalisation (Nab.com.au
2018). National Australian Bank is ranked 41st based on the total asset measured during the
year 2014. As of November 2017 National Australian Bank operates around 1590 branches
and services with approximately 4,412 ATM throughout Australia, New Zealand and Asian

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serving 12.7 million customers. National Australian Bank was created as the National
Commercial Banking Corporation of Australia Ltd during the year 1982 upon the merger of
National Bank of Australasia and the Commercial Banking Company of Sydney. As a result
this, the bank was subsequently renamed as the National Australian Bank Ltd.
The bank witnessed the period of quick expansion as National Australian Bank
bought several bank through acquisition with the acquisition of Home Side Lending which
was one of the leading US based mortgage originator and service provider having base in
Florida (Nab.com.au 2018). National Australian Bank launched during the year 2008
launched a brachless direct banking and traded separately as the U-Bank under the leadership
of the Greg Sutherland and Gerd Schenket. The National Australian Bank during the year
2009 commenced a strategy of reputation change, management of wealth and placed larger
emphasis on the domestic markets.
Ownership and structure of governance of the company:
Main Substantial Shareholders:
As of 31st October 2017, the Black Rock Group along with its associated companies
formed the substantial shareholders of National Australian Bank. The Black Rock Group held
more than 147,042,052 fully paid ordinary shares in the National Australian Bank that
accounted for 10.23% of the total ordinary shares (Nab.com.au 2018). Based on the
information it can be stated that National Australian Bank is a non-family based company.
The other largest shareholders of the National Australian Bank is stated below;
Name of the Shareholders Total Number of Shares Percentage of Shares Held
HSBC CUSTODY
NOMINEES
638,988,106 23.79%

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(AUSTRALIA) LIMITED)
J P MORGAN NOMINEES
AUSTRALIA LIMITED
319,495,521 11.90%
CITICORP NOMINEES
PTY LIMITED
155,591,328 5.79%
Based on the above stated shareholders information it can be stated that only one
shareholder which is HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED) formed the
largest shareholders of National Australian Bank as the HSBC CUSTODY NOMINEES
(AUSTRALIA) LIMITED) held more than 20% of the shares of National Australian Bank
(Nab.com.au 2018). There were only two shareholders that more than 5% of the total
ordinary shares of National Australian Bank. This included the J P MORGAN NOMINEES
AUSTRALIA LIMITED and the CITICORP NOMINEES PTY LIMITED with each holding
11.90% and 5.79% of the total number of shares. Based on the above shareholder
classification an argument can be bought forward by stating that the National Australian
Bank is non-family company with substantial portion of the shareholdings being held by
Black Rock Group and its associates.
Main people involved in Company’s Governance:
The main people that are involved in the National Australian Bank governance are
stated below;
Name Total No. Of Fully Paid Ordinary Shares
KR Henry (Chairman 10,360
DH Armstrong 10,480
PW Chronican 31,000
PK Gupta 7,480
AJ Loveridge 10,000
GC McBride 5,960

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DA McKay 10,000
AC Sherry 7,831
AG Thorburn 1,65,124
AKT Yuen 12,464
Senior executives
MB Baird 2,000
AJ Cahill 32,957
SJ Cook 2,000
AD Gall 93,269
AP Hagger 27,976
AJ Healy 44,642
GA Lennon 53,765
A Mentis 50,264
LN Murphy 34,072
PF Wright 2,000
As evident from the above stated tabular representation it can be stated that none of
the directors and the senior had more than 5% of the share holdings (Nab.com.au 2018).
Therefore, an argument bought forward by stating that there no such presence of family
members in the corporate governance of National Australian Bank.
Computation of Fundamental Ratios:
Short Term Solvency:
Particulars` 2017 2016
$000 $000
Current Assets A 43826.0 30630.0
Current Liabilities B 27417.0 41856.0
Inventory C 0.0 0.0
Prepayments & Other Assets D 196.0 189.0
Cash & Cash equivalents E 43826.0 30630.0
Current Ratio F=A/B 1.60 0.73
Quick Ratio G=(A-C-D)/B 1.59 0.73
Cash Ratio H=E/B 1.60 0.73
Table 1: Table Representing Solvency Ratios

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(Source: As Created by Author)
Long Term Solvency:
Particulars` 2017 2016
$m $m
Total Assets A 788325.0 776710.0
Total Equity B 51317.0 51315.0
Total Liabilities C 737008.0 725395.0
Debt-to-Equity Ratio D=C/B 14.36 14.14
Debt Ratio E=C/A 0.935 0.934
Equity Ratio F=B/A 0.065 0.066
Table 2: Table Representing Long Term Solvency Ratios
(Source: As Created by Author)
Asset Utilization:
Particulars` 2017 2016
$m $m
Total Assets A 788325.0 776710.0
Fixed Assets B 22242.0 27292.0
Revenue C 27403.0 27629.0
Trade & Other Receivables D 642.0 586.0
Total Asset Turnover Ratio E=C/A 0.03 0.04
Fixed Asset Turnover Ratio F=C/B 1.23 1.01
Receivables Turnover Ratio G=C/D 0.023 0.021
Table 3: Table Representing Asset Utilization Ratios
(Source: As Created by Author)

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Profitability Ratios:
Particulars` 2017 2016
$000 $000
Profit for the year A 5288.0 357.0
Revenue B 27403.0 27629.0
Total Assets C 788325.0 776710.0
Total Equity D 51317.0 51315.0
Net Profit Margin E= A/B 19.30% 1.29%
Return on Equity (ROE) F=A/D 10.30% 0.70%
Return on Assets G=A/C 0.67% 0.05%
Table 4: Table Representing Profitability Ratios
(Source: As Created by Author)
Market Value Ratios:
Particulars` 2017 2016
Earning per Share A 194.7 8.8
Dividend per Share B 198 198
Market Value per Share C 31.50 27.9
Dividend Payout Raio D=B/A 1.02 22.50
Dividend Yield Rate E=B/C 6.29 7.10
Price-to-Earning Ratio F=C/A 0.16 3.17
Table 5: Table Representing Market Value Ratios
(Source: As Created by Author)

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Graphical Descriptions of Results:
Movement in Monthly Share Price:
4/1/2015
6/1/2015
8/1/2015
10/1/2015
12/1/2015
2/1/2016
4/1/2016
6/1/2016
8/1/2016
10/1/2016
12/1/2016
2/1/2017
4/1/2017
6/1/2017
8/1/2017
10/1/2017
12/1/2017
2/1/2018
-15.000%
-10.000%
-5.000%
0.000%
5.000%
10.000%
Stock Price Movements
Percentage Monthly Change NAB Percentage Monthly Change ^AORD
Figure 1: Figure Representing Movement in Share Price of National Australian Bank
(Source: As Created by Author)
Comparative Analysis of Movement in Share Price Index to All Ords Index:
As evident from the graphical representation it can be stated that the share price of the
company has been relatively moderate with certain occasions of volatility being noticed. As
understood the share price of the National Australian Bank has been in accordance with the
all ordinary index (Gibbs et al. 2018). There have been instances during the month of
December 2015 where the share price of National Australian Bank declined to stand at -
8.41% while in the subsequent month of January 2016 the share price movement of National
Australian Bank reflects further decline and stood negatively at -9.36.
Nevertheless, in the following month of February National Australian Bank posted a
positive rise of 8.47 from the previous recorded downfall during the month of January (Radić

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et al. 2018). It can be stated the three was very less volatility in the share price movement of
National Australian Bank against the all ordinary index throughout the year of 2016 with
share prices of the bank rising as high as 4.36% during the month of June 2016 (Simply Wall
St 2018). Preceding to the following year of 2017 National Australian Bank reported a strong
rise in the price of shares to stand positively at 5.47% while the all ordinary index stood
1.52%.
A significant decline in the share price was noticed during the month of April in 2017
when the prices of shares fell as low as -11.41 against the negatively standing all ordinary
index of -3.17% (Alvesson and Robertson 2016). The financial year of 2017 reflects that the
share prices of the National Australian Bank on certain occasion reported a negative decline
against the all ordinary index. The year 2017 has witnessed a medium volatility in the share
prices compared to the figures reported against the all ordinary index. Overall it can be stated
on observing the share price movement of the National Australian Bank that there is an
existence of moderate volatility in share price of the bank.
Identifications of factors that influences the share price of the company:
There are certain factors that creates an impact on the share prices of the National
Australian Bank. The “Macroeconomic factors” includes the economic demand for loans.
The economic growth creates the demand for the loans and creates an impact on the ability of
the borrower to repay that directly impacts the share prices and the higher level of risk
undertaken by the National Australian Bank (Iannotta 2014). Following the consequences of
the global financial crisis tighter lending practices by the National Australian Bank has
resulted in more conservative lending’s. The macroeconomic factors suggest that the credit
creation is going strong in Australia at a rate of 2.5% of the GDP. As a result this creates an
influence in the share prices of the National Australian Bank.

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Another factor that create an influence in the share price of the National Australian
Bank is the “changes in the company focus”. This includes an increased focus on the
domestic mortgage market since the company has the reputation of working with the business
(Wójcik, Knight and Pažitka 2017). The investors may opt for making an investment in the
shares of National Australian Bank is primarily because of the rapidly growing business in
Australia.
The “industry wide factors” include the National Australian Bank relation with the
REA Group Ltd relating to the mortgage decision (Scott 2015). National Australian Bank has
also created a relation with the Afterpay Touch Group Ltd that is generating large amount of
growth in Australian and presently expanding in the foreign nations (Au.finance.yahoo.com
2018). The large number of the success of the National Australian Bank is reliant on the
Australian economy and the housing market.
The changes in the “management earnings forecast” also forms an important factor
that create an influence in the share price of the National Australian Bank (Robson, Young
and Power 2017). With stabilization in the loan funding costs and intensifying of the
competition in the market of home loan the Chief executive of the National Australian Bank
in his suggestion stated that he would cut down the rates of mortgage to synchronize with the
central bank when the time appears to be appropriate. This resulted in 25 basis point fall in
the share prices of National Australian Bank.
Calculations of Beta and the Expected Rate of Returns using CAPM:
Computed Beta of the Company:
The calculated beta of the National Australian Bank stands 1.20.

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Calculations of the required rate of Return using CAPM Model:
βa 1.20
Risk Free Rate (Rf) 4%
Expected market
return of Emmerson
Resources (Rm1) 6%
Required rate of return 6.40%
Table 6: Table Representing the Required Rate of Return for National Australian Bank
(Source: As Created by Author)
Conservative Investment:
Concerning the conservative of making an investment in the shares of National
Australian Bank it can be stated that the share prices of the National Australian Bank is lower
than then was a year before (Macve 2015). The share prices of the National Australian Bank
is presently 1 year low and with dividend yield of around 6.7% and the price earnings ratio of
13.4, the National Australian Bank is regarded as the best buy out among the Australian
banks. The inevitable rise in the rates of the reserve bank of Australian would increase the
National Australian Bank earnings and loans (Barillas and Shanken 2018). The rationale for
making a conservative investment in the shares of National Australian Bank is that the share
prices is below future cash flow value but not below the moderate discount of 20% and not
below the substantial discount of 40%.
The National Australian Bank is regarded as the good value in terms of the earnings
in comparison to the Australian market (Zabarankin, Pavlikov and Uryasev 2014).
Additionally the earnings of the National Australian Bank has witnessed growth and it is

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anticipated to the go further than the low risk savings rate of 4.6%. Over the period of five
years the National Australian Bank the annual earnings growth has been positive (Maynard
2017). Furthermore, the National Australian Bank has utilized its asset efficiently than the
Australian banking industry with better return on assets. Therefore, the banks has low risk of
dividend at the risk saving rate of 2.48% and the dividend of National Australian Bank is
currently top among the market players.
Computation of WACC:
Weighted Average Cost of Capital for National Australian Bank:
Re Cost of equity
Rd Cost of debt
Equity Market value of the firm’s equity
Debt Market value of the firm’s debt
E/V
Percentage of financing that is
equity
D/V
Percentage of financing that is
debt
TC Corporate tax rate
Re 6.4%
Rd 6%
Equity 51317
Debt 737008
E/V 0.065
D/V 0.93
TC 30%
WACC 4.34%
Table 7: Representing Weighted Average Cost of Capital for National Australian Bank
(Source: As Created by Author)

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Explanation of WACC has on management evaluation of investment prospective:
When it is noticed that the WACC is on the higher side then there prevails a sign of
greater risk associated to the functional operations of the organization (Warren and Jones
2018). Generally investors require higher amount of return to believe the existence of added
sum of risks. The weighted average cost of capital turns out to be an important instrument in
ascertaining the anticipated costs that is involved in the financing of the overall resources
(Martin and Roychowdhury 2015). This generally comprises of the imbursement of a sum
associated to the obligations of the debt or alternatively the costs that originates from the debt
financing and the required rate of return that is obligatory in management ownership or cost
associated in equity financing.
A large number of the listed companies usually has numerous funding sources. The
WACC aims to strike balance in the relative costs of several resources so that a single cost of
capital figure is generated (Hoyle, J.B., Schaefer and Doupnik 2015). In usual theory the
weighted average cost of capital comprises of the expenditure engaged in raising an
additional amount of money. Investors may voice their distress on finding that the WACC is
on the higher side of the actual return (Barberis et al. 2015). This results in warning sign a
firm may be losing out its worth. As a result the investors may not choose to invest when they
find that a higher return is available in the somewhere else in the market.
Debt Ratio:
The debt ratio of National Australian Bank for both the financial year of 2016 and
2017 stood stable at 0.93. The management of the National Australian Bank believes that
would be able to repay its debts (Henderson et al. 2015). The management to adjust its adjust
the gearing ratio bought a change in the capital structure was reported by National Australian
Bank as the bank transitioned to the revised level 2 group structure that created an immediate
effect on the capital position of the company (Jegadeesh et al. 2016). The remaining amount

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of the debt originating from the debt issued directly by the national wealth management
holdings were not any required.
Dividend Policy:
The directors of National Australian Bank have declared a final dividend that stood 99
cents per share fully paid on the ordinary shares with 100% franked. The dividend policy of
National Australian Bank states the company each year adjusts its dividend reinvestment plan
to reflect the position of capital and outlook (Lee. and Parker 2014). The National Australian
Bank offers its shareholders with 1.5 discount on the dividend reinvestment plan with no
limit in participation.
Letter of Recommendations
To ABC
Adelaide, Australia
Respected Sir,
As evident from the above stated analysis we would like to draw your attention
towards our letter that would be providing the recommendations for making investment in the
shares of National Australian Bank. The present share price of the National Australian Bank
is presently trading below the future cash flow but the share prices are not below the
moderate discount of 20%. National Australian Bank is viewed as the better prospect of
investment based on the earnings in comparison to the other Australian bank as the earnings
of the bank is anticipated to go beyond the low risk savings rate of 2.48%.
The dividend paid by the National Australian Bank is presently at top in comparison
to the other dividend payers in the market. A rise in the income of 6.93% is anticipated in the
following year. Though the dividends per share have been on the volatile side over the last

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five years but simultaneously the dividend per share of National Australian Bank has increase
in the last five years. The dividends paid by National Australian Bank is presently covered by
its net profit.
Additionally, the bank has liabilities that are made up of lower risk funding sources
with loans of the National Australian Bank is widely funded by the customer deposits. The
level of assets for National Australian Bank comparatively moderate in respect to its equity.
Bearing the mid the dividend that is paid by National Australian Bank, it is good prospect of
making an investment.
We anticipate the recommendations provided have helped in better understanding of
investment prospect in National Australian Bank.
Thank You
Conclusion:
A conclusion can be drawn by stating that share prices of the National Australian
Bank is currently trading a below one year low but the bank is believed to have strong cash
flow to meet its debts. From the perspective of investors the shares of bank is a good buy
since it provides good value of earnings in the Australian market. The earnings growth
though appears to be not above the Australian banking market average but it is in positive
track and with low risk of savings rate the shares of the National Australian Bank is currently
the good buy for the investors.

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