Why is the NAB share price stumbling today?

Posted: 5 May 2022 12:28 pm
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Shares in the Big Four bank have performed strongly in the last 6 months, rising 13% but today NAB is struggling.

Shares in National Australia Bank (ASX: NAB) are among the top traded shares on the ASX but not for the right reasons. The stock is getting a thumbs down from investors, slipping as much as 3.4% in early trading.

Rival Australia and New Zealand Banking Group (ASX: ANZ) was down more than 2% while Commonwealth Bank (ASX: CBA) and Westpac (ASX: WBC) were also trading lower.

Why is the NAB stock price leading banks lower?

The sell-off in NAB shares comes after the Big Four lender outlined its first half results on Thursday.

It reported a 4.1% improvement in half year cash profit to $3.48 billion, in line with analyst expectations. Statutory net profit for the 6 months to 31 March also rose 10.7% to $3.55 billion.

NAB also declared a higher than expected interim dividend payout of 73 cents a share, compared to 60 cents a year ago, largely thanks to stronger volumes, especially in its business and institutional segments.

However, investors focused on 2 key data points while pushing the stock lower.

Firstly, NAB's net interest margin (NIM), a key measure of profitability, declined 11 basis points from a year ago to 1.63%. While much of this was on account of the volatility in the markets and treasury portfolio, it also reflected the continuing competitive pressure in the home loan market, where the lender seems to have garnered market share but at the cost of margins.

Secondly, NAB also walked away from its target of reducing absolute costs by 2025, saying the need for investment to support the level of growth opportunities and emerging inflationary pressures require a different approach. In fact, it indicated a 2-3% increase in costs in the current fiscal year.

Rising cost base

NAB is the second major bank to shrug off its cost reduction objective. On Wednesday, smaller rival ANZ announced it was no longer focused on an absolute cost reduction target, previously flagged at $8 billion, because of rising costs.

Chief executive Ross McEwan has tried to sound an optimistic note saying that NAB was delivering good results by executing its strategy well and getting the basics right more consistently.

"This has been achieved during a period of increased customer activity across all divisions of the bank, including the fastest growth in business lending since the GFC," he said in a statement to the ASX.

Still, investors are factoring a generally higher cost base for the sector after the US Federal Reserve lifted rates by 50 basis points, the biggest increase since 2000. Economists widely expect similar increases in June and July and to flow through to rates globally.

Typically, rising interest rates are beneficial to banks as they provide a bigger margin buffer to lenders. But that trend could also turn out to be somewhat negative for Australian banks, which rely on overseas markets for a large part of their funding, because it increases their cost of funds.

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