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National Australia Bank Ltd (ASX: NAB) – FY21 profit result in line with expectations

Timothy Anderson

Timothy Anderson is a contributor with the Australian Stock Report and is currently in his final year of studying a Bachelor of Applied Economics and a Bachelor of International Relations and Politics at the University of Canberra. Tim has a genuine passion for economics, specifically in macroeconomic analysis including how certain macroeconomic policies and indicators affect financial markets and the economy, as well as how these factors affect personal investment strategies. Tim currently holds RG146 Tier 1 Generic Knowledge qualifications.

National Australia Bank Ltd (ASX:NAB) is one of the largest publicly listed banks in Australia. NAB has a market capitalisation of around A$95 billion.




What are the key features of NAB’s FY21 profit report?
NAB’s cash earnings (the preferred measure of profitability) for FY21 totalled $5.6 billion, up 77%. This strong growth in cash earnings was driven by a large turnaround in the impairment charge from a charge of $2.8 billion in FY20 to a benefit of $0.2 billion for FY21. This reflects the large impairment charge in FY20 due to expected losses arising from the economic contraction caused by COVID-19. However, this impact has turned out to be much lower than expected resulting in a significant write back in FY21. It can be expected that the impairment charge will return to more normal levels of approximately $1 billion in FY22.

Notwithstanding strong growth in cash earnings, underlying profit fell by 6.8% in FY21 for two reasons. First, expense (ex-notable items) rose 1.8% in FY21 driven by higher performance-based compensation and increased staffing (such as IT staff) partly offset by productivity benefits and lower restructuring costs. Second, the net interest margin (ex-notable items) declined by 6 basis points (bps) to 1.71% in FY21 due to lower Markets and Treasury income. Excluding Markets and Treasury income, the net interest margin (ex-notable items) was flat.

NAB’s Tier 1 capital ratio is 13% at 30 September 2021 (up 153 bps on 30 September 2020) and is comfortably ahead APRA’s benchmark of 10.5%. The increase reflects the sale of non-core businesses and increase in cash earnings partly offset by the buyback of NAB shares.

What is Westpac returning to shareholders?
NAB announced a final dividend of 67 cents per share (fully franked). This makes total dividends for FY21 of 127 cents per share compared with 30 cents per share for FY20 (which was impacted by the reaction to the COVID-19 economic shock). The dividend payout ratio for FY21 is around 66 per cent of cash earnings.

What is the outlook for NAB?
NAB did not provide any specific guidance for FY22. Like all the major banks, economic activity will drive profitability in FY22. The Australian economy is expected to recover strongly over the next 12 months following an expected contraction in the September quarter of 2021 due to the COVID-19 restrictions on NSW and Victoria. That said, as indicated above, the FY22 result is likely to be adversely impacted by a return to a more normal level of impairment charges. NAB is continuing to invest in its small and medium enterprises and home lending businesses such as simplifying processes and digital technology to increase market competitiveness.

What is the market reaction?
The market reaction to NAB’s FY21 result is broadly neutral. NAB shares are currently trading at around $29.20. NAB’s trades on a forward P/E ratio in the mid-teens and a dividend yield of around 4.5% (fully franked).


This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purposes only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceedings. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.

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