The share price of Australia’s fourth largest bank, National Australia Bank Ltd [ASX:NAB] is likely to come under pressure during the second half of this year.
At time of writing, NAB shares were trading at $26.96, up 0.37% or 18 cents from yesterday. Overall, NAB has made a return of -2.50% over the past 12 months.
Though outperforming its peers ANZ Banking Group [ASX:ANZ] and Westpac Banking Corp [ASX:WBC] in terms of 12-month returns, NAB’s share price could come under serious pressure after being hit with a class action lawsuit and being forced to hold more capital to deflect risk.
IMF Bentham Ltd [ASX:IMF] and William Roberts Lawyers, announced plans yesterday to launch a class action against the NAB-owned MLC Super Fund trustee company, Nulis Nominees.
The lawsuit alleges NAB’s wealth arm charged excess fees of over $100 million to clients from mid-2016. The class action will allege Nulis charged excess fees to an estimated 100,000 members through charging them excess fees to pay commissions to advisers.
According to The Australian Financial Review, the class action will be funded by IMF Bentham on a ‘no win, no pay’ basis, meaning members of the class action face no out-of-pocket costs.
IMF Bentham investment manager Ewen McNee said even small excess fees charged to super fund members could potentially affect the amount of money available to them at retirement.
Compounding issues for the bank, the Australian Prudential Regulation Authority (APRA) will force ANZ, NAB and Westpac, to hold an additional $500 million in capital to reflect the risks identified in their culture and governance self-assessments.
APRA noted that the banks will need to hold the additional capital until they have completed their customer remediation programs and fixed the problems identified in their assessments.
To date, NAB has already experienced significant uplift in customer remediation, with $170 million repaid to customers in the past 12 months.
‘Their self-assessments reveal that they have fallen short in a number of areas, and APRA is therefore raising their regulatory capital requirements until weaknesses have been fully remediated’, APRA chairman Wayne Byres said.
What’s does the future hold for NAB?
It’s clear from the gains made in share price since the beginning of the year that investors have put the 2018 royal commission behind them — almost. The bank is still in the process of finding a permanent replacement for former CEO Andrew Thorburn, who quit after scathing criticism from the commission earlier this year.
Lower interest rates could entice further lending but is sure to make an impact on bank’s margins. NAB has been fleet footed in this regard, having trimmed its interim dividend from 99 cents to 83 cents, though this still leaves NAB with a current payout ratio of 77%.
Analysts at Macquarie Group Ltd [ASX:MQG] expect underlying fees at each bank to shrink by $350 million to $650 million between last financial year and 2020–21, compared to a total banking sector fee pool of $12.98 billion last financial year.
This will likely lead to further margin squeezes, hurting the bank’s profitability and ultimately dividend levels. On current prices NAB is looking at a 6.78% dividend yield, much more than the average 1.90% you’d get from a term deposit.
But I would be wary of extrapolating this rate into the future. I also wouldn’t be surprised if we see further dividend cuts.
For Money Morning
PS: Check out this special 2019 report: The next generation of Aussie income super stars revealed. Hint: it’s not the banks. Click here to claim your copy now.