Risk Analysis of National Australia Bank

This study analyzes the risk and return of National Australia Bank to recommend investment. It includes an empirical analysis of monthly returns, market capitalization, and P/E ratios.

Running head: RISK ANALYSIS OF NATIONAL AUSTRALIA BANK
Risk Analysis of National Australia Bank
Name of the Student:
Name of the University:
Author Note:

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RISK ANALYSIS OF NATIONAL AUSTRALIA BANK
Table of Contents
Chapter 1: Introduction..............................................................................................................3
Chapter 2: Literature Review.....................................................................................................6
Chapter 2: Research Question....................................................................................................6
Chapter 3: Methodology............................................................................................................7
Chapter 4: Empirical Analysis...................................................................................................7
1. Monthly Return of NAB and S&P for the First Time.............................................8
2. Monthly Return of NAB and S&P for the Second Time.........................................8
3. Average monthly return, market capitalisation and P/E ratios of NAB for both period8
4. Line graphs plotting the share price history of NAB.AX and the S&P for both period
..........................................................................................................................................10
5. Histograms of monthly returns of the National Australia Bank for both period.........12
Standard deviation as a predictor of risk..............................................................................12
Estimated Variance and standard deviations of NAB.AX and S&P for both the period.....13
β as a better measure of risk.................................................................................................13
Chapter 6: Findings..................................................................................................................13
Discussion of estimated SD and Variance...........................................................................13
The risk measured by the SD...............................................................................................14
Explanation of Risk Premium through covariance of return from NAB and S&P..............14
Chapter 6: Discussion..............................................................................................................15
Capital structure...................................................................................................................15
Legislative changes impacting the financial company.........................................................15

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RISK ANALYSIS OF NATIONAL AUSTRALIA BANK
Competitive pressures..........................................................................................................16
International events..............................................................................................................17
Major suppliers and customers.............................................................................................17
Chapter 6: Conclusion..............................................................................................................17
Reference..................................................................................................................................19

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RISK ANALYSIS OF NATIONAL AUSTRALIA BANK
Chapter 1: Introduction
The stock return of a company depends on the market structure and the performance
of the market from where the company belongs. The market behaviour decides the risk of the
return from the stock of the company. Here, the stock of National Australia Bank is chosen
for the study.
The formation of National Australia Bank took place as National Commercial
Banking Corporation of Australia Limited in 1982 by combining the National Bank of
Australasia and the Commercial Banking Company of Sydney. The new company was named
as the National Australia Bank Limited (NAB). The representative offices of National
Australia Bank was set up in Athens (1984), Atlanta (1986), Beijing (1982), Chicago (1982),
Dallas (1983), Frankfurt (1985), Houston (1989), Kuala Lumpur (1984), New Delhi (1989),
San Francisco (1984), Seoul (1983), Shanghai (1988) and Taipei (1986). The NAB acquired
Clydesdale Bank of Scotland and Northern Bank from the Midland Bank in 1987. The Nab
also acquired Yorkshire Bank of England and Wales in 1990. It also acquired Bank of New
Zealand in 1992and Michigan National Bank in 1995. In 1991, NAB rationally closed its
offices in Atlanta, Chicago, Dallas, Houston and San Francisco (NATIONAL AUSTRALIA
BANK, 2018). The products and services of the NAB is business banking, consumer
banking, whose sale banking and wealth management and Insurance. In the recent years, the
major activities of the NAB were banking services, credit and access card facilities, housing
and general finance, leasing and wealth management services. Moreover, significant
activities were investment banking, funds management and custodian, trustee and nominee
services and international banking. The market price of a single share of NAB was $18.68
and the number of share was 2734 million on 31st January, 2019. So, the market capitalization
is $51073 million on 31st January, 2019.

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RISK ANALYSIS OF NATIONAL AUSTRALIA BANK
The details of the directors of the NAB directors in office in 2018 is listed below:
Dr Kenneth R Henry AC, BCom (Hons), PhD, DB h.c, FASSA, FAIIA, is
independent Director since November 2011. Chairman since December 2015. Chairman of
the Board's Nomination & Governance Committee.
Mr Andrew G Thorburn BCom, MBA, is non-independent Director since August
2014.
Mr David H Armstrong BBus, FCA, MAICD, is independent director since August
2014, Chairman of the Board's Audit Committee and a Member of the Risk Committee.
Mr Philip W Chronican BCom (Hons), MBA (Dist), GAICD, SF Fin is independent
Director since May 2016, Chairman of the Board's Risk Committee and a Member of the
Remuneration Committee. Director of BNZ (a subsidiary of NAB).
Mr Peeyush K Gupta BA, MBA, AMP (Harvard), FAICD, is independent Director
since November 2014, Member of the Board's Risk, Remuneration and Nomination &
REPORT OF THE DIRECTORS DIRECTORS’ INFORMATION 24 National Australia
Bank Governance Committees, Director of certain NAB Wealth and BNZ subsidiaries.
Ms Anne J Loveridge BA (Hons), FCA, GAICD, is independent Director since
December 2015, Chairman of the Board's Remuneration Committee and a Member of the
Nomination & Governance Committee.
Ms Geraldine C McBride BSc, is independent Director since March 2014, Member of
the Board's Audit Committee.
Mr Douglas A McKay ONZM, BA, AMP (Harvard), CMInstD (NZ), is independent
Director since February 2016, Member of the Board's Audit and Nomination & Governance
Committees and Chairman of BNZ (a subsidiary of NAB).

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RISK ANALYSIS OF NATIONAL AUSTRALIA BANK
Ms Ann C Sherry AO, BA, Grad Dip IR, FAICD, FIPAA, is independent Director
since November 2017 and Member of the Board's Remuneration Committee.
Mr Anthony K T Yuen B.Soc.Scs, is independennt Director since March 2010,
Member of the Board's Audit and Risk Committees.
The performance of the bank can be indicated by the P/E ratio which is nothing but
the expected price of a share measured on the basis of its earnings i.e. as the earning per share
rises the market value will rise. Here, the latest P/E ratio of the NAB was 8.664 on 31st
January in 2019. This indicates that the stock of NBA is trading at multiple of 8.664. The P/E
ratio of the competitor of NAB is ANZ (Australia and New Zealand Banking Group Limited)
on 31st January, 2019 was 11.25. This shows that the profitability of the investment in ANZ
is more than the NAB. Except the P/E ratio the dividend policy is important as it consists in
undertaking a specific financial decisions by the company on sharing its earnings with the
shareholders.
The directors of NAB had announced the final average dividend of 99% for the fully
paid ordinary shares, 100% paid. The payment that was proposed by the financial company,
was equal to approximately $2,707 million. The Group timely adjusts the Dividend
Reinvestment Plan (DRP) to represent the capital position and outlook. The dividends were
paid in the last financial year:
The final average dividend of 99% of the fully paid ordinary share for the year 2017
ended on 30th September, 100% paid on 13 December 2017. The meantime average dividend
of 99% for fully paid ordinary share for the year 2018 ended on 30th September, 100% paid
on 5 July 2018. The payment was $2659 million and $2696 million in December, 2017 and
July, 2018 respectively.

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RISK ANALYSIS OF NATIONAL AUSTRALIA BANK
The Australian franking credits at a tax rate of 30% is carried by the franked
proportion of the dividends which depicts the latest Australian Company tax rate which is
30%. The rate at which the imputation credits of New Zealand has been attached to the
dividend is NZ$0.15 per share. The proportion of the profit of the group with respect to the
Australian income tax and the future changes to Australia’s business tax system are the main
factors that decides the extent to which the future dividends will be franked.
Chapter 2: Literature Review
The research of mutual funds and stock investments always discuss about the risk and
return from the stocks and mutual funds. The volatility of the market is estimated arbitrarily
accurately over a time period by the researchers (Wang & Xu, 2015). The empirical analysis
uses the secondary data and finds that the market volatility and the proportional ownership
are correlated (Adam, Marcet & Nicolini, 2016). The industry portfolios can also forecast the
market volatility formed from S&P stocks. There are papers that discusses about the stock
return volatility without calculating covariance (Conrad & Loch, 2015). These papers discuss
about the recent development and growth and major internal and external changes. These
includes the dividend, changes in managing board of director, legislative changes and the
international events. Apart from the market volatility and return volatility of the stock, there
are few factors that have impact on the risk of the return. These discussed for the NAB.
The average dividend of 99% for fully paid ordinary share for the year 2018 ended on
30th September, 100% paid on 5 July 2018. The payment was $2659 million and $2696
million in December, 2017 and July, 2018 respectively (ANNUAL FINANCIAL REPORT,
2018). Antony Cahill left NAB in August 2018. The recent changes in managing board of
director is mentioned as follows: Rachel Slade left NAB who was acting in the Group
Executive Customer Products and Services role from August 2018. This are the major
changes in NAB (ANNUAL FINANCIAL REPORT, 2018).

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RISK ANALYSIS OF NATIONAL AUSTRALIA BANK
Chapter 2: Research Question
The study chooses the bank NAB which is listed in S&P.AX. This is a descriptive
study which analyses the banks current financial status to recommend whether to invest or
not in the stocks of NAB. Hence, the aim of the study is to find the risk and return of the
NAB to recommend investment.
Chapter 3: Methodology
The study collects secondary data of S&P.AX and NAB monthly closing share prices
from 2005 to 2018 and collected from the Yahoo finance (Yahoo is now a part of Oath,
2019). The data is used to calculate the average return and risk premium of NAB stocks in the
Australian stock market. To compare the growth of the financial stock of the company, two
time periods are considered. First time period starts from 2 February, 2005 to 1 February,
2012 and second time period starts from 2 February, 20012 to 1 February, 2019.
Chapter 4: Empirical Analysis
This section discusses about the share price statistics and basic estimation of average
return. Here monthly return of the bank and S&P.AX for the first period and second period,
average return, market capitalization, P/E ratios of the bank for both the period is calculated.
Two line graphs and histograms of the monthly return of the bank is prepared to discuss
about the trend of the monthly return and normality to interpret the risk premium of the
stocks for both the period risk premium. To use the CAPM model, Standard deviation,
variance and risk premium is calculated and discussed in the next section called findings.

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RISK ANALYSIS OF NATIONAL AUSTRALIA BANK
1. Monthly Return of NAB and S&P for the First Time
Date Monthly Retrun of S&P Monthly Retrun of NAB.AX Date Monthly Retrun of S&P Monthly Retrun of NAB.AX Date Monthly Retrun of S&P Monthly Retrun of NAB.AX
28-02-2005 30-06-2007 -0.021 -0.029 31-10-2009 0.013 -0.055
31-03-2005 -0.031 -0.006 31-07-2007 0.017 -0.076 30-11-2009 0.036 -0.014
30-04-2005 0.031 0.027 31-08-2007 0.051 0.054 31-12-2009 -0.062 -0.042
31-05-2005 0.042 0.078 30-09-2007 0.028 -0.012 31-01-2010 0.015 -0.038
30-06-2005 0.026 -0.028 31-10-2007 -0.033 0.098 28-02-2010 0.051 -0.029
31-07-2005 0.013 0.025 30-11-2007 -0.030 -0.115 31-03-2010 -0.014 0.075
31-08-2005 0.044 -0.003 31-12-2007 -0.109 -0.018 30-04-2010 -0.079 0.023
30-09-2005 -0.039 0.051 31-01-2008 -0.014 -0.070 31-05-2010 -0.029 -0.126
31-10-2005 0.039 0.006 29-02-2008 -0.039 -0.203 30-06-2010 0.045 -0.060
30-11-2005 0.028 -0.026 31-03-2008 0.045 0.077 31-07-2010 -0.020 0.101
31-12-2005 0.035 0.002 30-04-2008 0.011 0.007 31-08-2010 0.041 -0.073
31-01-2006 -0.002 0.049 31-05-2008 -0.078 0.030 30-09-2010 0.017 0.086
28-02-2006 0.042 0.075 30-06-2008 -0.046 -0.154 31-10-2010 -0.017 0.002
31-03-2006 0.025 0.031 31-07-2008 0.032 -0.081 30-11-2010 0.035 -0.097
30-04-2006 -0.049 0.001 31-08-2008 -0.104 -0.008 31-12-2010 0.002 0.025
31-05-2006 0.014 -0.059 30-09-2008 -0.127 0.029 31-01-2011 0.016 0.031
30-06-2006 -0.017 -0.014 31-10-2008 -0.069 -0.024 28-02-2011 0.001 0.060
31-07-2006 0.026 0.021 30-11-2008 -0.005 -0.174 31-03-2011 -0.003 -0.003
31-08-2006 0.008 0.014 31-12-2008 -0.049 0.043 30-04-2011 -0.024 0.050
30-09-2006 0.045 0.014 31-01-2009 -0.055 -0.095 31-05-2011 -0.021 -0.027
31-10-2006 0.018 0.040 28-02-2009 0.071 -0.073 30-06-2011 -0.040 -0.032
30-11-2006 0.034 0.022 31-03-2009 0.055 0.149 31-07-2011 -0.029 -0.047
31-12-2006 0.018 0.035 30-04-2009 0.010 0.022 31-08-2011 -0.067 -0.021
31-01-2007 0.010 0.002 31-05-2009 0.036 0.073 30-09-2011 0.072 -0.083
28-02-2007 0.028 -0.002 30-06-2009 0.073 0.002 31-10-2011 -0.041 0.164
31-03-2007 0.029 0.000 31-07-2009 0.055 0.124 30-11-2011 -0.015 -0.046
30-04-2007 0.024 0.061 31-08-2009 0.059 0.152 31-12-2011 0.051 -0.037
31-05-2007 -0.006 -0.011 30-09-2009 -0.021 0.069 31-01-2012 0.008 0.011
2. Monthly Return of NAB and S&P for the Second Time
Date Monthly Retrun of S&P Monthly Retrun of NAB.AX Date Monthly Retrun of S&P Monthly Retrun of NAb.AX Date Monthly Retrun of S&P Monthly Retrun of NAB.AX
29-02-2012 30-06-2014 0.044 -0.021 31-10-2016 0.023 0.000
31-03-2012 0.014 0.053 31-07-2014 -0.001 0.067 30-11-2016 0.041 0.037
30-04-2012 -0.073 0.024 31-08-2014 -0.059 0.009 31-12-2016 -0.008 0.056
31-05-2012 0.004 -0.123 30-09-2014 0.044 -0.090 31-01-2017 0.016 -0.014
30-06-2012 0.043 0.067 31-10-2014 -0.039 0.089 28-02-2017 0.027 0.055
31-07-2012 0.011 0.054 30-11-2014 0.018 -0.068 31-03-2017 0.010 0.040
31-08-2012 0.016 0.008 31-12-2014 0.033 0.030 30-04-2017 -0.034 0.025
30-09-2012 0.030 0.012 31-01-2015 0.061 0.060 31-05-2017 -0.001 -0.108
31-10-2012 -0.002 0.001 28-02-2015 -0.006 0.065 30-06-2017 0.000 -0.023
30-11-2012 0.032 -0.050 31-03-2015 -0.017 0.013 31-07-2017 -0.001 0.011
31-12-2012 0.049 0.031 30-04-2015 -0.002 -0.043 31-08-2017 -0.006 0.015
31-01-2013 0.046 0.098 31-05-2015 -0.055 -0.057 30-09-2017 0.040 0.038
28-02-2013 -0.027 0.095 30-06-2015 0.044 -0.021 31-10-2017 0.010 0.040
31-03-2013 0.045 0.026 31-07-2015 -0.086 0.035 30-11-2017 0.016 -0.097
30-04-2013 -0.051 0.102 31-08-2015 -0.036 -0.109 31-12-2017 -0.005 -0.002
31-05-2013 -0.025 -0.144 30-09-2015 0.043 -0.027 31-01-2018 -0.004 -0.011
30-06-2013 0.052 0.010 31-10-2015 -0.014 0.002 28-02-2018 -0.043 0.028
31-07-2013 0.016 0.063 30-11-2015 0.025 -0.023 31-03-2018 0.039 -0.052
31-08-2013 0.016 0.047 31-12-2015 -0.055 0.027 30-04-2018 0.005 0.016
30-09-2013 0.040 0.052 31-01-2016 -0.025 -0.075 31-05-2018 0.030 -0.079
31-10-2013 -0.019 0.029 29-02-2016 0.041 -0.102 30-06-2018 0.014 0.032
30-11-2013 0.006 -0.018 31-03-2016 0.033 0.070 31-07-2018 0.006 0.029
31-12-2013 -0.030 0.002 30-04-2016 0.024 0.032 31-08-2018 -0.018 0.007
31-01-2014 0.041 -0.047 31-05-2016 -0.027 0.003 30-09-2018 -0.061 -0.028
28-02-2014 -0.002 0.046 30-06-2016 0.063 -0.044 31-10-2018 -0.028 -0.080
31-03-2014 0.017 0.022 31-07-2016 -0.023 0.036 30-11-2018 -0.004 -0.021
30-04-2014 0.001 -0.004 31-08-2016 0.001 0.030 31-12-2018 0.039 -0.036
31-05-2014 -0.018 -0.051 30-09-2016 -0.022 0.024 31-01-2019 0.052 -0.224
3. Average monthly return, market capitalisation and P/E ratios of NAB for both period
3.1 Average monthly Return of NAB.AX for Both Period
Monthly Return of NAB.AX for the First
Period
Monthly Return of NAB.AX for the Second
Period
Mean 0.0000 Mean -0.0004
Standard Error 0.0075 Standard Error 0.00648
Median 0.0015 Median 0.01148
Standard Deviation 0.0683 Standard Deviation 0.05901
Sample Variance 0.0047 Sample Variance 0.00348

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RISK ANALYSIS OF NATIONAL AUSTRALIA BANK
3.2 Market capitalisation and P/E ratios of NAB for the first period
Date Market Capitalisation (in million $) P/E ratios Date Market Capitalisation (in million $) P/E ratios Date Market Capitalisation (in million $) P/E ratios
28-02-2005 42859.50 1.74 30-06-2007 62423.04 14.56 31-10-2009 56327.92 22.29
31-03-2005 42605.86 10.79 31-07-2007 57692.42 13.46 30-11-2009 55528.93 21.97
30-04-2005 43739.27 11.08 31-08-2007 60800.63 14.18 31-12-2009 53190.95 21.05
31-05-2005 47154.25 11.94 30-09-2007 60072.87 14.01 31-01-2010 53296.92 13.02
30-06-2005 45841.96 11.61 31-10-2007 65955.86 15.38 28-02-2010 51754.39 12.65
31-07-2005 46975.38 11.90 30-11-2007 58359.61 13.61 31-03-2010 55610.52 13.59
31-08-2005 46826.30 11.86 31-12-2007 57298.25 13.36 30-04-2010 56889.14 13.90
30-09-2005 49227.16 12.47 31-01-2008 55999.42 12.73 31-05-2010 49724.76 12.15
31-10-2005 49510.59 12.54 29-02-2008 44608.31 10.14 30-06-2010 46720.98 11.42
30-11-2005 48242.98 12.22 31-03-2008 48033.67 10.92 31-07-2010 51449.93 12.57
31-12-2005 48317.60 12.24 30-04-2008 48352.21 10.99 31-08-2010 47695.14 11.66
31-01-2006 51209.46 12.32 31-05-2008 49802.03 11.32 30-09-2010 51815.19 12.66
28-02-2006 55065.26 13.24 30-06-2008 42138.90 9.58 31-10-2010 51937.01 12.69
31-03-2006 56782.18 13.66 31-07-2008 38713.72 8.80 30-11-2010 46924.09 11.47
30-04-2006 56842.51 13.67 31-08-2008 38410.92 8.73 31-12-2010 48101.15 11.75
31-05-2006 53468.66 12.86 30-09-2008 39510.23 8.98 31-01-2011 50054.72 9.95
30-06-2006 52715.65 12.68 31-10-2008 38554.28 8.76 28-02-2011 53065.41 10.55
31-07-2006 53845.33 12.95 30-11-2008 31863.18 7.24 31-03-2011 52901.57 10.52
31-08-2006 54598.35 13.13 31-12-2008 33249.20 7.56 30-04-2011 55543.68 11.04
30-09-2006 55336.32 13.31 31-01-2009 36785.52 14.55 31-05-2011 54069.12 10.75
31-10-2006 57535.36 13.84 28-02-2009 34116.35 13.50 30-06-2011 52328.24 10.40
30-11-2006 58815.61 14.15 31-03-2009 39201.54 15.51 31-07-2011 49890.88 9.92
31-12-2006 60848.88 14.64 30-04-2009 40058.91 15.85 31-08-2011 48846.48 9.71
31-01-2007 61407.10 14.32 31-05-2009 42981.44 17.01 30-09-2011 44770.72 8.90
28-02-2007 61285.81 14.29 30-06-2009 43059.27 17.04 31-10-2011 52123.28 10.36
31-03-2007 61270.66 14.29 31-07-2009 48417.49 19.16 30-11-2011 49706.59 9.88
30-04-2007 65015.80 15.16 31-08-2009 55762.83 22.06 31-12-2011 47842.99 9.51
31-05-2007 64288.03 14.99 30-09-2009 59620.56 23.59 31-01-2012 50395.86 12.81
3.3 Market capitalization and P/E ratios of NAB for the second period
Date Market Capitalisation (in million $) P/E ratios Date Market Capitalisation (in million $) P/E ratios Date Market Capitalisation (in million $) P/E ratios
29-02-2012 50182.47 12.76 30-06-2014 73842.27 14.58 31-10-2016 74396.70 11.55
31-03-2012 52829.07 13.43 31-07-2014 78771.07 15.55 30-11-2016 77186.57 11.98
30-04-2012 54109.84 13.76 31-08-2014 79446.29 15.68 31-12-2016 81490.96 12.65
31-05-2012 47450.17 12.06 30-09-2014 72334.28 14.28 31-01-2017 80891.52 13.25
30-06-2012 50609.25 12.87 31-10-2014 78771.07 15.55 28-02-2017 85360.22 13.98
31-07-2012 53362.87 13.57 30-11-2014 73414.53 14.49 31-03-2017 88758.57 14.54
31-08-2012 53789.65 13.68 31-12-2014 75620.22 14.93 30-04-2017 90952.79 14.89
30-09-2012 54430.03 13.84 31-01-2015 89000.34 12.47 31-05-2017 81132.35 13.29
31-10-2012 54493.98 13.85 28-02-2015 94770.60 13.28 30-06-2017 79232.48 12.98
30-11-2012 51783.22 13.16 31-03-2015 95969.55 13.45 31-07-2017 80142.28 13.12
31-12-2012 53362.87 13.57 30-04-2015 91848.05 12.87 31-08-2017 81346.42 13.32
31-01-2013 61316.21 11.37 31-05-2015 86599.28 12.14 30-09-2017 84396.91 13.82
28-02-2013 67170.84 12.46 30-06-2015 84749.91 11.88 31-10-2017 87795.26 14.38
31-03-2013 68913.55 12.78 31-07-2015 87688.74 12.29 30-11-2017 79259.24 12.98
30-04-2013 75974.86 14.09 31-08-2015 78162.50 10.96 31-12-2017 79125.45 12.96
31-05-2013 65025.50 12.06 30-09-2015 76084.68 10.66 31-01-2018 79918.30 13.56
30-06-2013 65651.27 12.18 31-10-2015 76262.19 10.69 28-02-2018 82187.61 13.94
31-07-2013 69785.03 12.94 30-11-2015 74488.70 10.44 31-03-2018 77895.05 13.21
31-08-2013 73047.55 13.55 31-12-2015 76515.58 10.72 30-04-2018 79152.75 13.43
30-09-2013 76868.64 14.26 31-01-2016 71579.19 11.11 31-05-2018 72864.27 12.36
31-10-2013 79103.25 14.67 29-02-2016 64300.01 9.98 30-06-2018 75160.93 12.75
30-11-2013 77695.49 14.41 31-03-2016 68816.95 10.68 31-07-2018 77375.56 13.13
31-12-2013 77829.63 14.44 30-04-2016 70995.71 11.02 31-08-2018 77949.73 13.22
31-01-2014 74675.06 14.74 31-05-2016 71234.84 11.06 30-09-2018 75762.43 12.85
28-02-2014 78073.38 15.41 30-06-2016 68099.55 10.57 31-10-2018 69720.03 11.83
31-03-2014 79783.90 15.75 31-07-2016 70517.45 10.95 30-11-2018 68243.61 11.58
30-04-2014 79446.29 15.68 31-08-2016 72643.06 11.28 31-12-2018 65810.24 11.16
31-05-2014 75395.23 14.88 30-09-2016 74396.70 11.55 31-01-2019 51073.34 8.66

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RISK ANALYSIS OF NATIONAL AUSTRALIA BANK
4. Line graphs plotting the share price history of NAB.AX and the S&P for both period
4.1 The share price history of S&P for the first period
4.2 The share price history of NAB.AX for the first period

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RISK ANALYSIS OF NATIONAL AUSTRALIA BANK
4.3 The share price history of S&P for the second period
4.4 The share price history of NAB.AX for the second period

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RISK ANALYSIS OF NATIONAL AUSTRALIA BANK
5. Histograms of monthly returns of the National Australia Bank for both period
5.1 Histograms of monthly returns of the National Australia Bank for the first period
5.2 Histograms of monthly returns of the National Australia Bank for the first period
Standard deviation as a predictor of risk
The standard deviation of monthly return is calculated to present the volatility of
market which shows the risk of the stock. The risk of the return from the stock can be
measured with the help of standard deviation as a normally distributed return values fall in
the SD of the mean return. The higher standard deviation presents the higher unpredictability

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RISK ANALYSIS OF NATIONAL AUSTRALIA BANK
and the unpredictability of price shows the higher risk. Thus standard deviation explains the
future return (Bali & Zhou 2016).
Estimated Variance and standard deviations of NAB.AX and S&P for both the period
Monthly Return of NAB.AX for the First
Period
Monthly Return of NAB.AX for the Second
Period
Standard Deviation 0.0683 Standard Deviation 0.05901
Sample Variance 0.0047 Sample Variance 0.00348
Monthly Return of S&P For Second Period Monthly Return of S&P For First Period
Standard Deviation 0.03318 Standard Deviation 0.0431
Sample Variance 0.0011 Sample Variance 0.0019
β as a better measure of risk
The risk is sourced majorly from the loss of major customer, loss of legal battle,
major regulatory actions and the wide economic shocks like change in central bank policies,
changes in tax policies and finally natural disasters. The risk that has influence on the whole
market is called the systemic risk. The investment’s systematic risk is measured by the β
which provides an appropriate risk measure as it considers the risk which cannot be
diversifiable. While calculating β, it captures the market as well as the investment stock
volatility. Moreover, β is better measure as only the undiversifiable risk is priced and the
unique risk is diversified away. This is why the β is better measure (Swan, 2018). The
calculated risk premium is equal to 0.2089 and -0.16698 for the first period and second
period respectively.
Chapter 6: Findings
Discussion of estimated SD and Variance
The variance of the NAB.AX monthly return is 0.0047 in the first period and 0.00348
in the second period and the variance of monthly return from the S&P is 0.0019 for the first

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period and 0.0011 is for the second period. The standard deviation of the monthly return from
NAB.AX stocks is 0.0683 for the first period and 0.05901 for the first period. The standard
deviation of the monthly return from S&P is 0.03318 for the second period and 0.0431 is for
the first period (Duarte & Rosa, 2015).
The risk measured by the SD
The above discussed information clearly states that the risk of the monthly return
from the National Australia Bank is less risky for the second period as the SD of the return is
less in the second period than the first period. Similarly, the return form S&P is less risky in
the second period. The standard deviation of the return form NBA stocks is approximately
equal to the standard deviation of the return from S&P which means that the monthly return
from the NAB is equally volatile to the market return (Carr & Wu, 2016).
Explanation of Risk Premium through covariance of return from NAB and S&P
The risk premium is calculated for the NAB for both the period. The risk premium for
the first period is 0.2089 and for the second period is -0.16698. This implies that the risk of
the NAB is less volatile than the market for the first period as the covariance is greater than
zero but less than 1. The risk premium for the second period indicates a negative correlation
to the market (Bluhm, Overbeck & Wagner, 2016).
The risk premium greater than zero indicates the positive volatility of the company’s
stock to the market. The above discussion says that the risk for the NAB is less volatile than
the market risk in the first period. In the second period the risk is high and the expected return
is low when the market is growing (Graham & Harvey, 2018).
The above discussed literature mainly reviewed from the annual report of the NAB
supports the empirical estimations that the risk in second period time is negatively correlated.
There exists competitors that are performing better than the NAB and leads the market. The

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RISK ANALYSIS OF NATIONAL AUSTRALIA BANK
market capitalisation of Commonwealth Bank is estimated to be $143.125 billion which is the
largest market share out of the Big Four while market capitalisation of NAB is estimated to
be $75.415 billion which is the smallest market share according to the latest data. The earning
per share of National Australia Bank is $1.95 which is lowest among the Big Four Banks and
the PE ratio is second lowest which is 13.8. Thus, the NAB shares are less attractive while the
market is growing (Marrero, Puch & Ramos-Real, 2015).
Chapter 6: Discussion
In this section, the main development and changes in the latest time period is
discussed. This part helps to conclude and take the decision of investment apart from the
descriptive analysis. It includes the capital structure, legislative changes, competitive pressure
and major suppliers and customers.
Capital structure
The capital structure is nothing but the distribution of debt and equity which makes up
the finances of a company. To see the changes in the company here the debts and equities of
2018 and 2017 are compared. The amount of total equity in the year 2018 was $52172
million and in the year 2017 it was $51317 million which shows that the amount of equity
has been increasing. The amount of total deposit and borrowing was $448616 million in 2018
and $450010 million in 2017. This means the amount of debt is falling which is a good sign
for the future growth of the bank.
Legislative changes impacting the financial company
In the end of the year 2017, the Australian Government established a Royal
commission into “misconduct in the Banking, Superannuation and Financial Services
Industry”. A Royal Commission is nothing but a formal public inquiry. Only the executive
branch of the Australian Government can instigate the Royal Commission and the terms of

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RISK ANALYSIS OF NATIONAL AUSTRALIA BANK
reference direct this. The Royal Commission had organized the public hearings on a wide
range of business events which is related to the business and operations of the Group during
2018. This includes the consumer lending, business lending, provision of financial advice and
the conduct of the financial regulators. The Royal Commission expected to make
recommendations in the final report, which, if implemented, could impact the Group’s
business. The Group remains committed to the fully co-operating with the Royal Commission
to make sure its success.
The RBNZ and the NZ Financial Markets Authority takes the initiative to review the
conduct and culture in the NZ banking industry in May 2018. This includes a number of
industry-wide recommendations in the report which was published on 5th November 2018.
The specific recommendations for individual NZ banks that includes the BNZ, were expected
to be provided in November 2018. The result of the review can lead to increase the further
olitical or regulatory scrutiny of the banking industry in NZ. This also could adversely impact
BNZ.
Competitive pressures
There are four major companies in Australia and they are called Big Four Banks. The
banks are Westpac, National Australia Bank, Commonwealth Bank and Australia and New
Zealand Bank. The market capitalisation of Commonwealth Bank is $143.125 billion which
is the largest market share out of the Big Four while market capitalisation of NAB is $75.415
billion which is the smallest market share according to the latest data (COMMONWEALTH
BANK OF AUSTRALIA, 2018). The earning per share of National Australia Bank is $1.95
which is lowest among the Big Four Banks and the PE ratio is second lowest which is 13.8.
Thus, the NAB shares are less attractive. The WBC shares are more attractive than NAB
shares as the PE ratio is lowest and the EPS is $2 which is greater than the NAB’s EPS
(Limkriangkrai, Koh & Durand, 2017).

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International events
NAB announced with the prior agreement to APRA. The announcement depicts that it
would practice its option to offset the £400 million Trust Preferred Securities on 17th
December, 2018. Each Trust Preferred Security is subjected to rescue the cash at the rate of
£1000. In addition, it will focus on accumulated in regular distribution. Other than the matter
noted, there are no items, transactions or events of a material or unusual nature that have
arisen in the period between 30 September 2018 and the date of this report that, in the opinion
of the directors, have significantly affected or may significantly affect the operations of the
Group, the results of those operations or the state of affairs of the Group in future years.
Major suppliers and customers
There are three major customer segments that are small business, medium business
and investors. These are the priority customer segments of NBA. An integrated banking
model serves the customers and the model is led by managing partners with the help of
business banking centers and the small business customer hubs. This covers Health
specialists, Agribusiness specialists, Government experts, Education specialists, Community
and Franchising (GECF), Professional Services and Commercial Real Estate experts. The
division also serves high net worth customers through the Private Bank and JBWere.
Chapter 6: Conclusion
The above statistical figures about the monthly return from the National Australia
Bank and S&P.AX market says that the monthly return from the National Australia Bank is
less risky for the second period, the return form S&P is less risky in the second period and the
monthly return from the NAB is equally volatile to the market return . The NAB stocks
are less volatile than the market for the first period as the covariance is greater than zero but
less than 1. The risk premium for the second period indicates a negative correlation to the
market.

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RISK ANALYSIS OF NATIONAL AUSTRALIA BANK
The information says that the investment in NAB is not a good idea as the estimated
risk premium for the second period is negative which shows the negative correlation with the
market return. The market is growing as the leading banks which are the biggest competitor
of NAB, are performing well. In this case, the investment will turn into a loss. So, it is better
not to invest in the NAB stocks. Whereas, the investment in commonwealth bank may give
profit as it is the leading market and the EPS and PE ratio is far better than the NAB’s.

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RISK ANALYSIS OF NATIONAL AUSTRALIA BANK
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