National Australia Bank - Macquarie · note "National Australia Bank - Back in Business", 14/01/15...

Please refer to page 17 for important disclosures and analyst certification, or on our website

www.macquarie.com/research/disclosures.

AUSTRALIA

NAB AU Outperform

Price (at 04:00, 17 Jun 2015 GMT) A$33.37

Valuation A$ 36.49 - DCF (WACC 9.6%, beta 1.0, ERP 5.0%, RFR 5.8%)

12-month target A$ 38.02

12-month TSR % +19.9

Volatility Index Low

GICS sector Banks

Market cap A$m 87,267

30-day avg turnover A$m 213.2

Number shares on issue m 2,615

Investment fundamentals Year end 30 Sep 2014A 2015E 2016E 2017E

Net interest Inc m 13,775 14,410 15,413 16,272 Non interest Inc m 5,138 5,309 5,480 5,660 Underlying profit m 8,733 10,792 11,538 12,436 Reported profit m 5,295 6,977 7,465 8,070 Adjusted profit m 5,184 6,748 7,247 7,852 EPS adj ¢ 213.9 267.9 270.7 290.5

EPS adj growth % -13.5 25.3 1.0 7.3 PER adj x 15.6 12.5 12.3 11.5 PER rel x 0.99 0.75 0.81 0.83 Total DPS ¢ 195.2 196.6 198.0 201.0 Total div yield % 5.8 5.9 5.9 6.0 Franking % 100 100 100 100 ROA % 0.6 0.7 0.7 0.8

ROE % 11.0 13.0 12.6 13.0 Equity to assets % 5.4 5.8 5.8 5.9 P/BV x 1.7 1.6 1.5 1.4

NAB AU vs ASX 100, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, June 2015

(all figures in AUD unless noted)

18 June 2015 Macquarie Securities (Australia) Limited

National Australia Bank Inflection Point Event

The NAB thesis centres on 3 areas. Recent changes provide further upside if

things turn out better than expected (conduct charges, life/MLC). Secondly,

there is upside from the business banking turnaround, which will take time.

Finally, we note the renewed shareholder value focus which is set to improve

returns in other areas of the bank (e.g. retail, IT). As a result, we resume

coverage with an Outperform and $38.02 price target. With a sector leading

yield, capital ratio and FY16 earnings inflection point, NAB becomes our top

pick.

Impact

Further upside from UK conduct and MLC - The recently announced

changes at NAB (capital raising, demerger of the UK, reinsurance at MLC) are

now well and truly reflected in the NAB share price. However, looking forward

there are potential sources of upside. Whilst there is no guarantee, there is a

chance NAB won't need to use all the reserving set aside for conduct (84bp

capital). Likewise, the reinsurance of MLC may well be the start of a longer term

solution around the life book of NAB which could release ~72bp of capital. Both

of these provide room for further growth.

Business bank turnaround in train but will take time - As highlighted in our

note "National Australia Bank - Back in Business", 14/01/15 we believed that

NAB needed to hire more frontline bankers. The bank continues this process at

pace. However, as highlighted in our note, the turnaround will take time with the

upside of c$300m most likely a 2016/17 prize.

Shareholder focus restored at NAB, which will be good for shareholders

(and the sector) - The final part of the thesis is the evidence pointing towards a

greater level of pragmatic and rational behaviour at the bank. As we had

pointed out in our note "National Australia Bank - Back in Business", 14/01/15,

we believe that NAB's discount pricing strategy in mortgages hadn't added to

shareholder value with market share gains largely offset by cuts in fees and

margin erosion. The reversal of this strategy with the most recent mortgage

repricing (+1.3% cash earnings upside) is an indication of something broader

emerging at the bank. Clearly the new management team is giving greater

consideration to the creation of longer term shareholder value which is positive

for NAB and the sector in general.

Earnings and target price revision

Following the 1H15 result as well as announced changes, we upgrade our

FY15 cash earnings by 4%, FY16 cash earnings by 1% and our target price

moves to $38.02.

Price catalyst

12-month price target: A$38.02 based on a DDM/PE methodology.

Catalyst: 3Q15 Trading update August.

Action and recommendation

We resume coverage with an Outperform recommendation. With a sector

leading yield, capital ratio and FY16 earnings inflection point, NAB becomes our

top pick.

http://www.macquarie.com/research/disclosures

Macquarie Wealth Management National Australia Bank

18 June 2015 2

Analysis

The NAB thesis centres on 3 areas.

Recent changes announced (conduct charges/ MLC) provide further upside if plans made

turn out better than expected.

The second leg of the thesis depends on the business banking turnaround, which will still

take time.

The final leg to the thesis centres on a newfound shareholder value focus which is set to

improve returns in other areas of the bank (e.g. retail, IT).

We discuss each of these in further detail below.

Further upside from UK conduct and MLC

The recently announced changes at NAB (capital raising, demerger of the UK, reinsurance at

MLC) are now well and truly reflected in the NAB share price. Looking forward there are potential

sources of upside.

Release of UK conduct reserve - Whilst there is no guarantee, there is a chance the bank

won't need to use all the reserving set aside for conduct (84bp capital).

Sale of MLC Life – Likewise, the reinsurance of MLC may well be the start of a longer term

solution around the life book of NAB which could release 72bp of capital.

Both of these provide room for further growth. We discuss these sources of upside in further detail

below.

Potential capital release if reserving set aside for conduct is not needed

As part of the proposed Clydesdale de-merger, NAB has set aside £1.7bn (~AU$3.3bn) to provide

capital support for any further conduct provisions. This figure is capped and was reached in

agreement with the UK Prudential Regulation Authority (PRA). The capital support of £1.7bn is to

be deducted from NAB CET1 at separation and equates to c84bps of CET1.

In addition to the £1.7bn severe stress test cap, NAB currently has a £726m provision remaining

related to UK conduct charges. It is worth noting that the £1.7bn will only be utilized once the

£726m provision has been fully utilized. The chart below details the utilized vs. remaining

provision currently.

Fig 1 In addition to the £1.7bn capital support, NAB has £726m in un-utilized UK conduct provisions at 1H15

Source: NAB, June 2015

Per NAB as at 2H14, Clydesdale had a PPI utilization rate of 36% and a 39% utilization rate for

interest rate hedging products. The tables below compares Clydesdale’s utilization rates to peers.


18 June 2015 3

Fig 2 PPI provision utilization rate % (as at 2H14)

Fig 3 Interest Rate Hedging products provision utilization % (as at 2H14)

Source: NAB, June 2015 Source: NAB, June 2015

Another measure which could indicate a potential utilization rate is data from the UK Financial

Ombudsman (available for PPI claims only) comparing the % of cases resolved in favour of the

consumer vs. peers. The UK Ombudsman also discloses the number of new cases for the

previous 6 months.

Clydesdale has an average resolution rate of 58% vs. peers at 57%.

Fig 4 Clydesdale PPI resolution vs. peers

Business Name PPI - % of cases resolved in

favour of the consumer PPI - Number of new cases (6 months to Dec 31 2014)

Lloyds Bank PLC 82% 20,145 Aviva Insurance Limited 77% 770 Barclays Bank Plc 68% 15,768 MBNA Limited 68% 3,982 HSBC Bank plc 61% 8,648 Capital One (Europe) plc 60% 6,289 Financial Insurance Company Limited 60% 3,176

Clydesdale Bank Plc 58% 2,131

Bank of Scotland Plc 54% 15,732 National Westminster Bank Plc 50% 3,216 The Co-operative Bank Plc 48% 792 The Royal Bank of Scotland Plc 46% 3,642 Santander UK Plc 44% 3,575 Tesco Personal Finance PLC 43% 893 Allianz Insurance Plc 39% 736 Marks & Spencer Financial Services plc 34% 625 Canada Square Operations Limited 25% 1,669 Yorkshire Building Society 7% 652 Nationwide Building Society 5% 3,025 Average across all institutions 57%

Source: UK Ombudsman, June 2015

It is worth noting that the £1.7bn represents a severe stress scenario, which NAB has stated is far

higher than NAB and Listco’s conduct stress scenarios, specifically on:

PPI – severe stress scenario includes the potential for higher levels of walk-in complaints and

potential outcome of the ‘past business review’ which considered all sales since 2005.

IRHP/FRTBL – severe stress scenario includes potential for additional claims for redress

sales of out-of-scope products

At their 1H15 result, NAB noted that actual losses lower than £1.7bn should result in a capital

release to the group over time. Every £200m of capital not utilized represents c10bps of CET1.

Another potential source of upside is also the sale of the MLC Life. We discuss the upside in

further detail below.


18 June 2015 4

Upside from sale of MLC Life

At the 1H15 result, NAB announced a reinsurance transaction with a major reinsurer that released

~$500m (13bps) of CET1 capital to the Group, resulting in a reduction in cash earnings of

approximately $25m pa, implying a P/E of ~20x. Additionally, NAB estimates the capital released

represents approximately 15% of NAB Wealth’s life insurance embedded value, implying an EV

for the entire life business of ~$3.3bn. The pricing of the deal implies that going forward NAB’s

experience losses will normalise to near zero from ~$33m in the last three periods, which

suggests this was a good deal for NAB.

Fig 5 Upside remains should NAB complete additional reinsurance transactions

CET1 (bps) CET1 ($m) Earnings ($m) Implied P/E (x)

Announced Reinsurance transaction 13 500 25 20.0 Gross up (@15%) 85 3,333 167 Remaining 72 2,833 142

Source: Company data, Macquarie Research, June 2015

Whilst entering into additional reinsurance arrangements would benefit the Group, it would appear

the preferred option is to dispose of the Life business altogether. A recent AFR report suggested

that NAB had received an offer north of $2.5bn from Nippon Life, although there does appear to

still be a shortfall from NAB’s internal embedded value calculation. Should NAB receive their

internal valuation for the Life Company they would see their capital increase by 85bps; however,

given the recent reinsurance deal reached, it would seem likely any transaction would be

completed at a discount to EV of ~20%.

Fig 6 NAB’s group CET1 ratio could be boosted by 61-85 bps depending on the price received for the Life Company

P/EV 0.6x 0.7x 0.8x 0.9x 1.0x

EV 3333 3333 3333 3333 3333 Gain/loss on sale -933 -700 -467 -233 0 CET1 benefit 61 67 73 79 85


Business bank turnaround to take time though

As highlighted in our note "National Australia Bank - Back in Business", 14/01/15 we believe NAB

needs to hire more frontline bankers. The bank continues this process at pace with 150 new hires

announced in 1H15. However, as highlighted in our note and by management, the turnaround will

take time with the upside of c$300m most likely a 2016/17 prize.

In order to restore the business franchises’ status as the undisputed market leader, we believe

management will have to implement the following:

Hiring additional frontline business bankers (150 hired so far with more expected in 2H15);

Increasing capex/reinvestment in the business bank;

Working out ways of normalising retail fees perhaps by offering customers additional value

added products and services; and

A normalisation of the business banking margin (in train and in our numbers).

We now assess the likely financial impact and timing of the proposed solutions.

Hiring additional frontline business bankers and look to retain existing bankers

At their 1H15 result, NAB announced they had hired 150 new additional frontline bankers with

plans to hire a further 70 bankers in 2H15. Given the amount of business bankers that have left

the franchise in recent years, in our view NAB would have to hire closer to 400 business bankers

(250 more post 1H15). In the scenario below, we assume that NAB is able to hire the required

bankers by the end of 2016. This in turn would generate $709m of additional revenue as at 2H17.

This assumes annual revenue of $1.1m per business banker with half of this delivered in the

period after hiring and the balance being obtained one year after being hired.


18 June 2015 5

The additional staff would bring about just above $190m of increased salary expenses over the

same period (using NAB’s historical business bank disclosures, we have estimated a $220k

annual salary per business banker). Of course the cost would be incurred before the revenue

uptick which could be hard for the market to swallow. The other option for NAB is to try and utilize

the broker market more which could variabilize the cost base although this obviously comes with a

lower quality (and disintermediated) cost base.

Fig 7 Estimated impact from the addition of 250 new bankers up to 2H17

2H15 1H16 2H16 1H17 2H17 Total

Bankers hired 70 90 90 0 0 250 Revenue Generated ($m) 42 102 147 197 222 709 Salary expense increase 24 34 44 44 44 190

Source: Macquarie Research, June 2015

Increasing capex/reinvestment in the business bank – An additional cA$150m required

We think that NAB needs to direct any additional investment spend towards the NextGen business

banking platform and other customer centric tools, which would likely drive future growth in the

business bank.

Fig 8 Investment initiatives announced by NAB at the FY14 result Fig 9 …making progress on those initiatives in 1H15

Source: Company Data, Macquarie Research, June 2015 Source: Company Data, Macquarie Research, June 2015

We factored in ~$129m of additional costs from 2H15 to 2H17 assuming $25m of additional costs

in 2H15, then 2% annualised cost growth in FY16 and FY17. We note that much of this increased

investment spending is likely to be from the utilization of productivity benefits NAB is likely to

receive, however, given this would have been a cost saving if not reinvested and should result in

future benefits for NAB, we are of the view that it is prudent to classify these as additional costs.

Fig 10 Additional costs arising from reinvestment in the business bank

2H15 1H16 2H16 1H17 2H17 Total

Additional Costs ($m) 25 26 26 26 26 129



18 June 2015 6

This additional investment would likely lead to future revenue benefits and based on the same

assumptions highlighted above (50c of revenue in perpetuity for each $1 of growth capex), NAB

could see ~$270m of revenue generated between now and 2H17 if reinvested productively.

Fig 11 Potential future revenue generated from reinvesting in the business bank

2H15 1H16 2H16 1H17 2H17 Total

Revenue Benefit ($m) 25 38 51 64 77 267


Fully normalise the business banking margin to claw back market share losses

Recently, NAB has sought to arrest the slide in their market share of business loans, with their

share remaining at ~23% since March 2014. Not surprisingly, this has led to some margin

contraction in the business bank. Whilst this confirms that normalisation of the business banking

margin has commenced, we still think there are some segments where NAB is “out” of the market,

suggesting that there may be additional margin contraction to come.

Our current estimates for NAB’s Group NIM is for 2bps of margin contraction in FY15 and a

benefit to NIM in FY16 from the increase in free funds post capital raise. These are broadly in line

with consensus estimates. As highlighted in National Australia Bank - Once and Done, we expect

margin contraction in the business bank (24bps through to the end of FY16).

Fig 12 The expectation is for NAB to experience margin compression in FY15 but expansion in FY16

FY14A FY15E FY16E

Consensus Net Interest Income 13,775 14,438 14,607 Total Assets 883,301 965,038 989,910 Implied Interest Earning Assets 711,594 750,427 769,768 Consensus – NAB Group NIM 1.94% 1.92% 1.90% Macquarie – NAB Group NIM 1.92% 1.94% Macquarie – NAB Aus. Bank Business NIM 2.21% 2.04% 1.97%


We believe NAB can close much of the A$0.4-0.5b revenue gap although it will cost money upfront and has some execution risk

In return for the investment outlined above, we believe NAB can close a vast majority of the

earnings gap. The only issue remains that investors will need to wear the initial investment

(A$350m cumulative to 2H17) before the revenue upside comes through over the course of the

next 1-2 years. All of this might be made a little easier if NAB was able to find a way of restoring

lost retail banking fees, which would provide some investment breathing space for the business

bank.

Fig 13 NAB could reinstate over $400m pa of revenue from FY17

$m 2H15 1H16 2H16 1H17 2H17 Total

Costs Salary expense from hiring new staff 24 34 44 44 44 190 Investment spend from reinvestment 25 26 26 26 26 129 Foregone revenue from lost mkt share 11 17 22 28 34 113

60 76 92 98 105 432 Benefits Revenue generated from new staff 0 102 147 197 222 667 Benefit from growth capex 25 38 51 64 77 254 Retail fee income recovered 16 24 32 32 32 137

41 164 230 293 331 1058

Net PPOP generated from initiatives -19 88 138 194 226 627

Net Cash profit -13 62 96 136 158 439

Cumulative Cash Profit -13 48 145 281 439 % of forecast earnings -0.4% 1.9% 2.8% 3.9% 4.4%



18 June 2015 7

As demonstrated in the table above, NAB could close the majority of the revenue gap by the end

of FY17, with ~$420m of annual revenue being generated from these new initiatives. This would

add ~$300m annually to cash earnings or ~4% from FY17.

Fig 14 Revenue and earnings trajectory should NAB effectively execute on the various business bank initiatives


The above initiatives do of course come with an associated level of execution risk (inability to hire

staff, the economic cycle turns or investment is not productively utilized); however, given NAB’s

decisive streak since their new CEO has taken over and their clear intentions to refocus their

energy back on their domestic franchise, we are optimistic the new management team can restore

the strength the business bank once possessed.

Shareholder focus restored at NAB which will be good for shareholders (and the sector)

The final element of the thesis is the evidence pointing towards a greater level of pragmatic and

rational behaviour at the bank with the most recent mortgage repricing as an indication of

something broader emerging at the bank. Other examples of the renewed focus on longer term

shareholder value includes repricing of high rate UBank deposits, the restructuring of the NextGen

rollout as well as NAB’s change in strategy in New Zealand. Clearly the new management team is

giving greater consideration to creation of longer term shareholder value which is a pleasant

occurrence for NAB and the sector in general. We discuss below.

Discount pricing strategy on the “break-up” campaign did not add customer value

Due to the impact the “break-up” campaign had on the retail divisions, NAB’s other businesses

were expected to fill the revenue gap or at least not worsen the problem, which was done through

managing the margin. This however resulted in below system growth that is still being seen today.

-50

0

50

100

150

200

250

2H15 1H16 2H16 1H17 2H17

$m

Revenue Cash Profit


18 June 2015 8

Fig 15 Between 1H11 and 2H13 NAB’s Business Banking margin was the most resilient vs peers...

Fig 16 ...however, this translated to below system growth, with the flow on effects still being seen today

Source: Company Data, Macquarie Research, June 2015

Note: System data includes institutional banking divisions

Source: APRA, Macquarie Research, June 2015

As a result, we estimate the total foregone revenue from NAB’s business bank since 1H12 to be

~$1.3bn (or $440m p.a.). To arrive at this figure we have assumed NAB’s business credit growth

was in-line with that of system growth and when NAB’s margin was holding up we have applied

the average margin contraction of peers to NAB.

Fig 17 Assuming system growth and margin compression in line with peers NAB’s business bank has foregone ~$1.3bn of revenue since 1H12


Upside from retail fee adjustments around A$24m cumulative

As we discussed in our note "National Australia Bank - Back in Business", 14/01/15, we believe

that NAB's discount pricing strategy in mortgages hadn't added to shareholder value with market

share gains largely offset by cuts in fees and margin erosion.

NAB has foregone ~$180bn annually in retail fee revenue since the launch of the “break-up”

campaign in 2011. To date, this has translated to a ~70bps increase in their share of the mortgage

market. Assuming NAB would sacrifice ~25% of their market share gains, but recover the same

proportion of their lost retail fees, we estimate NAB would see revenue in the retail bank increase

by ~$9m p.a.

-0.35%

-0.30%

-0.25%

-0.20%

-0.15%

-0.10%

-0.05%

0.00%

Business Division NIM delta (1H11 - 2H13)

ANZ CBA NAB

0%

5%

10%

15%

20%

25%

30%

1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14

NAB Cumulative Business Credit Growth

System Cumulative Business Credit Growth

2.00%

2.10%

2.20%

2.30%

2.40%

2.50%

2.60%

2.70%

2,500

2,600

2,700

2,800

2,900

3,000

3,100

3,200

3,300

3,400

1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14

NIM$m

Operating Income Foregone Revenue Actual NIM Revised NIM

Cumulative foregone revenue ~$1.3bn since 1H12; $440 p.a.


18 June 2015 9

Fig 18 We estimate NAB would receive an additional $24m of revenue through to 2H17 by normalising retail fees, which equates to ~$9m p.a.

2H15 1H16 2H16 1H17 2H17 Total

Market share losses (bps) 2.9 2.9 2.9 2.9 2.9 17.5 Reduction in Mortgages ($b) 406 417 426 438 451 2139 Lost NII ($m) 10.9 16.6 22.4 28.3 34.5 113 Recovered Non-NII ($m) 16.1 24.1 32.1 32.1 32.1 137

Net revenue benefit ($m) 5.2 7.5 9.8 3.8 -2.3 24


Doing this would provide NAB with some breathing space to compete in business banking. The

bank might look to negotiate this sort of strategy not as a “clawback of the break-up” campaign but

rather as an extension of the value for money strategy, perhaps via:

A clear expression to customers of the value that they have received from NAB over

comparable products at other major banks, thanking them for their support and asking if there

are other needs that NAB retail could help with;

Considering other value adding products could be launched to leverage the newly acquired

customer base as well as the existing “business banking” driven customer base; and

Considering charging for behaviours which reduce value (such as low level depositors which

still get access to bonus rates, high offset customers who get competitive mortgage rates).

Recent mortgage repricing seen as a reversal of this strategy and a more rational focus on creating longer term shareholder value

The first example of the shift in strategy at NAB is the recent mortgage repricing undertaken. In

line with the May rate cut (-25bp to 2.00% cash rate) NAB took the opportunity to reprice

mortgages, only cutting their SVR by 20bps. We estimate that by holding back 5bps on the SVR,

NAB will be able to uplift earnings by 1.3%.This will provide NAB with an earnings advantage over

ANZ and WBC who did not take the opportunity to reprice as much.

Fig 19 Potential earnings uplift of 1.3% from mortgage repricing

Australian mortgages

($m) Repricing (bps) Additional

Earnings FY15 cash

earnings Earnings uplift

ANZ 217,756 0 0.0 7,309 0.0% CBA 370,043 5 129.5 9,289 1.4% NAB 258,154 5 90.4 6,742 1.3% WBC 362,779 3 76.2 7,719 1.0%


Further rate cuts could provide NAB with an opportunity to further reprice. Our economics team

currently forecasts an additional 25bps cash rate cut in 4Q15.

Deposit metrics are also indicating a more rational approach towards retail banking

Since 2H13, NAB’s deposit growth has been driven by transaction accounts, partially offset by

modest declines in term deposits. As a result, NAB’s deposit NII has benefitted from this

approach. Given deposit OOI has declined, NAB’s low fee strategy is apparent; however, with

annualised deposit income growth from 2H13 of ~9% this has been the correct approach.


18 June 2015 10

Fig 20 NAB have been increasing deposits through transaction accounts... Fig 21 ...which has given deposit income a boost

Source: NAB, Macquarie Research, June 2015 Source: Company data, Macquarie Research, June 2015

During the same period, NAB has been repricing their higher rate UBank deposits. At the

beginning of 2012, the average UBank term deposit rate was ~100bps above the peer average.

That spread is currently 33bps, suggesting there could still be some additional upside from

repricing.

Fig 22 UBank deposits have been repriced by ~70bps since Jan-12... Fig 23 ...which has led to a slowdown in deposit growth

Source: Canstar, Macquarie Research, June 2015 Source: NAB, Macquarie Research, June 2015

A further 33bps of repricing, could boost earnings by ~$40m pa, or 0.6%. Whilst this could result in

continued pressure on UBank deposit balances, the recent growth in transaction account balances

has not yet started to normalise and would likely offset any lost deposit balances in the near term.

Fig 24 Repricing UBank deposits to peer average could boost Group earnings by 0.6%

UBank deposits ($bn) 16.8

Earnings from repricing ($m) 38.8 Earnings upside 0.6%


799 820

899921

5048

4543

600

650

700

750

800

850

900

950

1000

2H13 1H14 2H14 1H15

$b

NII OOI

9% annualised deposit income growth rate

since 2H13

-0.40

-0.20

-

0.20

0.40

0.60

0.80

1.00

1.20

3-Jan-12 3-Jan-13 3-Jan-14 3-Jan-15

%

Ubank TD rate vs peer average

NAB TD rate vs peer average

UBank TD's are still ~33bps above

the peer average


18 June 2015 11

Tech roll-out – More rational approach to roll-out likely to benefit retail

While NAB’s former management had an ambitious NextGen rollout program, current

management realised they needed to prioritise and focus on certain delivery streams. We think

this is the correct strategy and will allow NAB to deliver shareholder value.

Fig 25 Management highlighted a shift in strategy on NextGen at 2H14

Source: NAB, Macquarie Research, June 2015

One of the NextGen streams that management has prioritised is the Personal Banking Origination

Platform. This is expected to be rolled out in 2H15 and will allow NAB to process personal banking

applications faster as well as reduce the need for physical documentation.

Fig 26 Personal banking origination platform implementation should assist with re-focus on retail

Source: NAB, Macquarie Research, June 2015


18 June 2015 12

NAB trying to take a more long term approach to NZ

NAB recently held an investor day in NZ and highlighted the change in strategy at their New

Zealand business, BNZ particularly on the retail side of the business. New Zealand currently

represents 11% of group NPAT and BNZ thinks their current retail market share (16% market

share in housing lending) is below what it naturally should be. To try and address their under-

penetration in retail, BNZ is focused on addressing three areas; Auckland, Broker and Digital.

We discuss this strategy in further detail below

BNZ is under-penetrated in Auckland – BNZ’s retail main bank share is 9% in Auckland

(compared to 12% nationally) driven by an underweight position in Auckland housing.

Auckland currently accounts for 35% of NZ GDP and is forecast to grow at 5% p.a over the

next 3 years. To grow their market share in Auckland, BNZ is investing in mobile bankers and

has hired 50 new frontline bankers with 50 more to hire.

Re-entering Broker channel – BNZ re-entered the broker channel on May 18 after a 12-yr

absence. They have partnered with NZ Financial Services Group (largest broker in NZ with

c50% of broker flow in Auckland). They will launch with 100 brokers initially with the aim to lift

to 450 in first 12mths. BNZ noted that the broker channel reduces the lending margin by

30bps but that they still see a strong housing RoE.

Fig 27 NAB is under-represented in the Auckland market vs. peers Fig 28 BNZ has just re-entered the NZ broker market

Note: CBA do not disclose % of lending that is attributable to Auckland



Digital – Investing in their digital capabilities and have 132 digital focused FTEs. BNZ were

the first to launch a digital wallet in NZ (launched in March 2015). They are currently migrating

all customers to YouMoney to grow retail presence. BNZ highlighted that they are the only

bank that has bio-metrics recognition (have 200k customers registered).

NAB is also well placed to benefit from any RBNZ regulatory change vs. peers with RBNZ investor mortgage risk weight changes likely to have a minimal impact to Group CET1. BNZ has an average mortgage risk weight of 32% vs. ANZ at 24% and ASB at 28%. BNZ also noted that 10.5% of their portfolio is above 80% LVR (vs. peers at 14-18%). BNZ also noted they use a serviceability buffer of 7.6%.

26

12

18

-

5

10

15

20

25

30

37%

38%

39%

40%

41%

42%

43%

44%

ANZ NAB WBC

% Auckland Housing

$bn

Auckland housing lending ($bn) (RHS)Auckland % of total housing

38%

1%

26%

22%

0%

5%

10%

15%

20%

25%

30%

35%

40%

ANZ BNZ WBC System


18 June 2015 13

Fig 29 NAB has the highest mortgage risk weight vs. peers

Fig 30 NAB has the lowest proportion of >80% LVR mortgages vs. peers

Note: WBC mortgage risk weight not disclosed



Overall, we think there are several opportunities for NAB to focus on returning shareholder value,

most notably around mortgage and deposit repricing as well as prioritising their IT rollout and

changing their NZ strategy.

Investment View

The recently announced changes at NAB (capital raising, demerger of the UK, reinsurance at

MLC) are now well and truly reflected in the NAB share price. Similar to the other majors, we

believe that the market overcorrected for NAB post the Wayne Byres speech on 29 April (see our

notes Australian Banks - Byres Beats Basel on Capital Blow and Australian Banks - May

Madness). In our view, the sector would require $11.4-18.5b of additional capital to offset an

increase to average mortgage risk weights of 25-30%, with $4.7-11.7b of market overreaction in

the month following Byres’ speech.

Fig 31 The market priced in a more than worst case capital scenario for the majors

Source: Company data, FactSet, Macquarie Research, June 2015

The NAB thesis centres on 3 pillars. Recent changes announced provide further upside if plans

made turn out better than expected (conduct charges, life/MLC). The second thesis leg depends

on the business banking turnaround which will still take time. The final leg to the thesis centres on

a newfound shareholder value focus which is set to improve returns in other areas of the bank

(e.g. retail, IT). As a result, we resume coverage with an Outperform and $38.02 price target. With

a sector leading yield, capital ratio and FY16 earnings inflection point, NAB becomes our top pick.

15%

17%

19%

21%

23%

25%

27%

29%

31%

33%

ANZ CBA NAB

Mortgage Risk weight %

-9.0%

-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

ANZ CBA NAB WBC

Relative performance Impact from Byres' Speech

Additional capital (30%) / Mkt cap Additional capital (25%) / Mkt cap

$0.1-1.5b market

overreaction on

$0.9-3.1b market overreaction on

risk weights$2.1-4.2b market overreaction on

risk weights

$1.6-3.0b market overreaction on

risk weights


18 June 2015 14

Fig 32 FY16 metrics show NAB moving ahead of peers...

Fig 33 ...with EPS growth hitting a point of inflection in 2H16 post capital raise and GWB removal

ANZ CBA NAB WBC

Cash NPAT growth 3.0% 4.2% 7.4% 4.4%

Dividend Yield 5.6% 5.4% 6.0% 5.9%

CET1 ratio (2H15) 8.6% 9.3% 10.1% 9.3%

Source: Company data, Macquarie Research, June 2015 Source: Company data, Macquarie Research, June 2015

We have made the following changes to our earnings:

Capital raising – On a 1H15 pro-forma basis, the capital raise results in cash EPS dilution of

4.5%. The dilution is spread over FY15 and FY16 given the timing of the raise and the use of

average shares to determine diluted EPS.

1H15 result – NAB’s 1H15 result was a 3.3% beat vs. our estimates due to better than

expected operating income while expenses were in line with expectations.

Sell-down of GWB – The exclusion of GWB post 2H15 reduces assets by c$9bn and results in

a reduction of cash earnings by cUS$108m (1H15 cash earnings of US$54m).

Life reinsurance transaction – reduces NAB Wealth earnings by c$25m p.a.

NIM – We estimate the 2H15 margin is positively impacted (+1bps HoH) by the additional

earnings on free funds.

CET1 – Positive impact from rights issue (c140bps), GWB sale (30bps), Life reinsurance

(13bps) as well as cash earnings generation partially offset by UK conduct provision (c84bps),

conglomerates ruling (FY15 impact of 19bps) as well as RWA growth.

Fig 34 Earnings changes

FY15 FY16 FY17

Cash NPAT Old 6,485 7,162 7,778 New 6,748 7,247 7,852 % Change 4.1% 1.2% 1.0% Cash EPS Old 263 286 304 New 270 271 291 % Change 2.4% -5.2% -4.6% Dividend Old 199 199 206 New 198 198 201 % Change -0.5% -0.5% -2.4%


While the above Cash EPS growth in FY16 may not seem like much at 0.4% YoY it is skewed by

the impact of the capital raise as well as the sale of GWB. Below we show a pro-forma cash EPS

figure adjusting for the impact of the capital raise as well as for the remainder of the sale of GWB.

Cash EPS adjusting for these items is much stronger at 6.2% in FY16 and 7.4% in FY17.

Fig 35 Pro-forma Cash EPS (adj for capital raise & GWB) shows solid FY16 & FY17 growth

FY15 FY16 FY17

Pro-forma Cash EPS 275 292 314 EPS Growth % 6.2% 7.4%


-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

ANZ CBA NAB WBC

2H15 1H16 2H16 1H17 2H17

EPS Inflection Point for NAB in 2H16


18 June 2015 15

Fig 36 NAB Financial Summary


National Australia Bank Year Ending 30 September 2013 1H14 2H14 2014 1H15 2H15 2015 2016 2017

Outperform PER SHARE DATA

Cash EPS (AUD) - Macquarie Basis 251 131 85 216 136 134 270 271 291

Current Price Target Price Cash EPS Growth (%) 5% 3% -35% -14% 60% -2% 25% 0% 7%

A$33.35 $38.02 DPS (AUD) 190 99 99 198 99 99 198 198 201

Total Shareholder Return 19.9% BVPS (AUD) 17.89 18.21 18.41 18.41 18.97 19.18 19.18 20.12 21.23

NTA PS (AUD) 14.64 14.88 15.15 15.15 15.65 16.33 16.33 17.07 17.95

Bloomberg: NAB AU Shares on issue (m) 2,349 2,354 2,366 2,366 2,421 2,625 2,625 2,647 2,668

Reuters: NAB.AX

VALUATION METRICS

Macquarie Equities | Australian BanksP/E (Cash) 13.3 12.7 19.6 15.4 12.3 12.5 12.4 12.3 11.5

Analyst(s) Contact(s) P/B (Stated) 1.9 1.8 1.8 1.8 1.8 1.7 1.7 1.7 1.6

Michael Wiblin +61 2 8232 6089 P/NTA 2.3 2.2 2.2 2.2 2.1 2.0 2.0 2.0 1.9

Anita Stanley +61 2 8232 9869 RoE (%) 12.2% 13.6% 8.6% 11.1% 13.7% 12.9% 13.3% 12.5% 12.8%

Brendan Carrig +61 2 8237 6043 RoA (%) 0.7% 0.7% 0.5% 0.6% 0.7% 0.7% 0.7% 0.7% 0.8%

Dividend Yield (%) 5.7% 3.0% 3.0% 5.9% 3.0% 3.0% 5.9% 5.9% 6.0%

Dividend Payout (%) 75.8% 75.4% 116.3% 91.5% 72.7% 74.0% 73.4% 73.2% 69.2%

Sustainable RoE used in Valuation (%) 12.7% 12.7% 12.7% 12.7% 12.7% 12.7% 12.7% 12.7% 12.7%

Cost of Equity (%) 9.6% 9.6% 9.6% 9.6% 9.6% 9.6% 9.6% 9.6% 9.6%

PROFIT & LOSS (AUDm)

Net Interest Income 13,407 6,843 6,932 13,775 7,121 7,289 14,410 15,413 16,272

Non-Interest Income 5,173 2,644 2,494 5,138 2,663 2,646 5,309 5,480 5,660

Fees & Commissions 3,561 1,804 1,848 3,652 1,221 1,261 2,482 2,616 2,673

Financial Markets 769 249 750 999 456 470 926 968 1,007

Life and Funds 1,335 723 717 1,440 781 801 1,582 1,651 1,717

Other Revenue -492 -132 -821 -953 205 114 319 245 263

Total Operating Income 18,580 9,487 9,426 18,913 9,784 9,935 19,719 20,893 21,931

Total Operating Costs 8,174 4,456 5,724 10,180 4,460 4,467 8,927 9,355 9,495

Employee Costs 4,362 2,292 2,240 4,532 2,329 2,376 4,705 4,319 4,493

Other Costs 3,812 2,164 3,484 5,648 2,131 2,091 4,222 5,036 5,002

Pre-Provision Operating Profit 10,406 5,031 3,702 8,733 5,324 5,468 10,792 11,538 12,436

Impairment Charge 1,934 528 349 877 455 498 953 1,055 1,101

Pre-Tax Profit 8,472 4,503 3,353 7,856 4,869 4,970 9,839 10,483 11,335

Tax Expense 2,337 1,263 1,229 2,492 1,424 1,433 2,857 3,018 3,265

Minority Shareholders -8 -3 0 -3 -20 0 -20 0 0

Other Post Tax Items 675 381 -315 66 -15 0 -15 0 0

Stated Net Profit 5,452 2,856 2,439 5,295 3,440 3,537 6,977 7,465 8,070

Extraordinary & Other Items 675 384 -315 69 -11 0 -11 0 0

Hybrid Distributions -188 -90 -90 -180 -109 -109 -218 -218 -218

IoRE/Non Controlling Interest -3 0 0 0 0 0 0 0 0

Derivatives & Hedging Revaluation 0 0 0 0 0 0 0 0 0

Macquarie Cash Profit 5,936 3,150 2,034 5,184 3,320 3,428 6,748 7,247 7,852

7.4%

BALANCE SHEET & CAP AD (AUDm)

Risk Weighted Assets * 362,078 367,224 367,652 367,652 393,238 389,109 389,109 415,315 488,582

Interest Earning Assets 662,028 707,170 715,993 711,582 745,411 757,524 751,468 792,694 840,042

Gross Loans, Advances & Acceptances 521,757 534,172 545,361 545,361 573,490 582,809 582,809 619,565 654,876

Total Deposits 559,238 582,739 599,059 599,059 634,650 644,341 644,341 684,977 724,016

Total Assets 808,427 846,014 883,301 883,301 958,587 969,272 969,272 1,019,073 1,067,562

Shareholders Equity 46,620 47,478 47,908 47,908 49,868 56,415 56,415 59,453 63,037

Tier 1 Capital 37,480 39,774 39,758 39,758 43,752 48,185 48,185 50,310 53,021

Tier 1 Ratio (%) * 10.4% 10.8% 10.8% 10.8% 11.1% 12.4% 12.4% 12.1% 10.9%

Core Tier 1 Ratio (%) - Basel III 8.4% 8.6% 8.63% 8.6% 8.9% 10.1% 10.1% 10.0% 9.0%

ASSET QUALITY

Impairment Charge / GLAA (bp) 37 20 13 16 16 17 16 17 17

Coverage (%) 63% 68% 76% 76% 146% 144% 144% 140% 134%

KEY RATIOS & GROWTH

Net Interest Income growth (%) 0.8% 0.6% 1.3% 2.7% 2.7% 2.4% 4.6% 7.0% 5.6%

Non-Interest Income growth (%) 5.0% 4.5% -5.7% -0.7% 6.8% -0.6% 3.3% 3.2% 3.3%

Total Revenue growth (%) 2.0% 1.7% -0.6% 1.8% 3.8% 1.5% 4.3% 6.0% 5.0%

Cost growth (%) 4.4% 6.1% 28.5% 24.5% -22.1% 0.2% -12.3% 4.8% 1.5%

Pre-Provision Profit growth (%) 0.1% -2.0% -26.4% -16.1% 43.8% 2.7% 23.6% 6.9% 7.8%

RWA growth (%) 9.3% 1.4% 0.1% 1.5% 7.0% -1.1% 5.8% 6.7% 17.6%

GLAA growth (%) 4.2% 2.4% 2.1% 4.5% 5.2% 1.6% 6.9% 6.3% 5.7%

Deposit growth (%) 4.9% 2.8% 4.1% 7.1% 3.8% 1.6% 5.4% 6.3% 5.7%

Net Interest Margin (%) 2.03% 1.94% 1.94% 1.94% 1.91% 1.92% 1.92% 1.94% 1.94%

Cost / Income Ratio (%) 44.0% 47.0% 60.7% 53.8% 45.6% 45.0% 45.3% 44.8% 43.3%

*B2.5 2012, B3 2013 onward

0.0%

0.5%

1.0%

1.5%

2.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2013 1H14 2H14 2014 1H15 2H15 2015 2016

Margins & Volumes

Net Interest Margin (%) GLAA growth (%)

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

2013 1H14 2H14 2014 1H15 2H15 2015 2016

Efficiency

Cost / Income Ratio (%) Cost growth (%)

10

15

20

25

30

35

40

60%

70%

80%

90%

100%

110%

120%

130%

140%

150%

160%

2013 1H14 2H14 2014 1H15 2H15 2015 2016

Asset Quality

Impairment Charge / GLAA (bp) Coverage (%)

5.457.19

23.07

0.78

0.0

5.0

10.0

15.0

20.0

25.0

Total Stage 1 Dividends

Total Fade Period Dividends

Total Perpetuity Dividends

Total Surplus Capital Per Share

DDM Valuation


18 June 2015 16

Macquarie Quant View

The quant model currently holds a marginally positive view on National

Australia Bank. The strongest style exposure is Growth, indicating this

stock has good historic and/or forecast growth. Growth metrics focus on

both top and bottom line items. The weakest style exposure is Profitability,

indicating this stock is not efficiently converting its investments to earnings

as proxied by ratios such as…

Displays where the

company’s ranked based on

the fundamental consensus

Price Target and

Macquarie’s Quantitative

Alpha model.

Two rankings: Local market

(Australia & NZ) and Global

sector (Banks)

336/666 Global rank in

Banks

% of BUY recommendations 47% (7/15)

Number of Price Target downgrades 3

Number of Price Target upgrades 1

Macquarie Alpha Model ranking Factors driving the Alpha Model

A list of comparable companies and their Macquarie Alpha model score

(higher is better).

For the comparable firms this chart shows the key underlying styles and their

contribution to the current overall Alpha score.

Macquarie Earnings Sentiment Indicator Drivers of Stock Return

The Macquarie Sentiment Indicator is an enhanced earnings revisions

signal that favours analysts who have more timely and higher conviction

revisions. Current score shown below.

Breakdown of 1 year total return (local currency) into returns from dividends, changes

in forward earnings estimates and the resulting change in earnings multiple.

What drove this Company in the last 5 years How it looks on the Alpha model

Which factor score has had the greatest correlation with the company’s

returns over the last 5 years.

A more granular view of the underlying style scores that drive the alpha (higher is

better) and the percentile rank relative to the sector and market.

Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

Fu

nd

am

en

tals

Quant

Local market rank Global sector rank

Attractive

-0.3

-0.1

0.2

0.3

0.5

0.5

0.6

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Westfield Corporation

Scentre Group

National Australia Bank

Suncorp

Commonwealth Bank

Westpac Banking Corporati…

ANZ Bank

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%


Scentre Group


Suncorp

Commonwealth Bank


ANZ Bank

Valuations Growth Profitability Earnings

Momentum

Price

Momentum

Quality

-1.2

-0.6

0.0

-0.3

-0.3

-0.3

0.2

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0


Scentre Group


Suncorp

Commonwealth Bank


ANZ Bank

-70% -50% -30% -10% 10% 30% 50% 70%


Scentre Group


Suncorp

Commonwealth Bank


ANZ Bank

Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

-28%

-28%

-27%

-25%

27%

27%

28%

35%

-40% -20% 0% 20% 40%

⇐ Negatives Positives ⇒

Profit Margin FY1

Return on Equity NTM

EBITDA Revisions 3 Month

Return on Equity FY1

Dividend Yield FY1

Price to Sales FY0

Dividend Yield LTM

Dividend Yield FY0

0 1

Technicals & TradingRisk

LiquidityCapital & Funding

QualityPrice Momentum

Earnings MomentumProfitability

Growth

ValuationAlpha Model Score

-0.73-0.08

1.53 0.13

-0.16-0.13

-0.18-0.48-0.09

-0.33 0.22

0 1

Normalized

Score

0 50 100

Percentile relative

to sector(/666)

0 50 100

Percentile relative

to market(/415)


18 June 2015 17

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie First South - South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 31 March 2015

AU/NZ Asia RSA USA CA EUR

Outperform 48.99% 59.51% 49.30% 43.79% 59.59% 52.20% (for US coverage by MCUSA, 7.42% of stocks followed are investment banking clients)

Neutral 34.12% 26.62% 35.21% 50.29% 34.93% 31.32% (for US coverage by MCUSA, 5.68% of stocks followed are investment banking clients)

Underperform 16.89% 13.87% 15.49% 5.93% 5.48% 16.48% (for US coverage by MCUSA, 0.87% of stocks followed are investment banking clients)

NAB AU vs ASX 100, & rec history

(all figures in AUD currency unless noted)

Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.


12-month target price methodology

NAB AU: A$38.02 based on a DCF methodology

Company-specific disclosures: NAB AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of National Australia Bank's equity securities. MACQUARIE EQUITIES LIMITED or one of its affiliates managed or co-managed a public offering of securities of National Australia Bank Ltd in the past 12 months, for which it received compensation. MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates managed or co-managed a public offering of securities of National Australia Bank Ltd in the past 12 months, for which it received compensation. Macquarie Capital (Australia) Limited or one of its affiliates may provide National Australia Bank Limited investment advisory services for which it may or may not receive compensation. Macquarie Capital (Australia) Limited or one of its affiliates may provide National Australia Bank Limited investment advisory services for which it may or may not receive compensation. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

Date Stock Code (BBG code) Recommendation Target Price 10-Mar-2015 NAB AU Outperform A$40.01 05-Feb-2015 NAB AU Outperform A$39.31 14-Jan-2015 NAB AU Outperform A$36.23 30-Oct-2014 NAB AU Neutral A$31.75 22-Oct-2014 NAB AU Neutral A$31.57 01-Oct-2014 NAB AU Neutral A$31.74 25-Sep-2014 NAB AU Neutral A$32.98 16-Sep-2014 NAB AU Neutral A$34.35 02-Jul-2014 NAB AU Neutral A$34.67 17-May-2014 NAB AU Outperform A$37.60 08-May-2014 NAB AU Outperform A$37.78 20-Mar-2014 NAB AU Outperform A$39.85 21-Feb-2014 NAB AU Outperform A$39.02 22-Jan-2014 NAB AU Outperform A$39.86 04-Dec-2013 NAB AU Outperform A$38.07 31-Oct-2013 NAB AU Outperform A$37.36 23-Sep-2013 NAB AU Outperform A$37.18


18 June 2015 18

16-Sep-2013 NAB AU Outperform A$36.54 05-Sep-2013 NAB AU Outperform A$36.17 20-Aug-2013 NAB AU Outperform A$35.56 09-Jul-2013 NAB AU Outperform A$35.01 21-Jun-2013 NAB AU Outperform A$35.23 28-May-2013 NAB AU Outperform A$34.79 09-May-2013 NAB AU Outperform A$34.36 21-Mar-2013 NAB AU Outperform A$32.25 13-Mar-2013 NAB AU Neutral A$30.34 07-Feb-2013 NAB AU Neutral A$27.11 01-Feb-2013 NAB AU Neutral A$26.30 24-Jan-2013 NAB AU Neutral A$25.83 11-Jan-2013 NAB AU Neutral A$25.55 31-Oct-2012 NAB AU Neutral A$25.27 19-Oct-2012 NAB AU Neutral A$26.34 02-Oct-2012 NAB AU Outperform A$27.25 23-Jul-2012 NAB AU Outperform A$26.84 03-Jul-2012 NAB AU Outperform A$27.27

Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN 94 122 169 279, AFSL No. 318062) (“MGL”) and its related entities (the “Macquarie Group”) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN 41 002 574 923, AFSL No. 237504) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group‘s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

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