New CEO will struggle to lift NAB profits for shareholders
NAB recently announced its next chief executive, Ross McEwan, who will take charge no later than April 2020.
With an extensive understanding of the Australian banking market as a former retail head of Commonwealth Bank, and overseas experience as chief executive of the embattled Royal Bank of Scotland (RBS) since 2013, McEwan appears a safe bet.
A new chief executive is often hired based on their prior roles, although it's hard to tell how effective McEwan really was.
RBS was a poisoned chalice, the poster child for poor banking practices prior to the global financial crisis, a bank that would have died were it not for the UK government tipping in over £45bn in 2008.
McEwan was tasked with stabilisation rather than restoring former glories. RBS did return to profitability and dividends were restored so, on that basis, he did well.
At NAB, he faces a different set of problems. The bank must complete a tough cost-cutting program and continue technology improvements instigated by long-term predecessor Andrew Thorburn.
Banking profitability has also weakened as lending growth tails off and capital and regulatory requirements increase. NAB has cultural problems, too, although it is not alone.
Tough outlook for NAB
It's hard to see how McEwan can materially affect NAB's market position.
Commonwealth Bank and Westpac are better banking franchises due to their greater scale and exposure to residential mortgage lending.
Despite present housing market conditions, these remain highly profitable for the big two home lenders, which also soak up more low-cost household deposits than their peers.
Even so, below $24, equivalent to a price-to-book ratio of about 1.3, we'd be inclined to upgrade NAB.
If McEwan made strides on cost-cutting and technology upgrades, we might be prepared to pay a little more as success in these areas may improve the bank's profitability.
NAB's quarterly update on August 14 will be the next opportunity to hear of its progress, but it'll be a while longer before we get to hear from McEwan himself. For now, HOLD.
InvestSMART's recommended maximum portfolio weightings are 8% for NAB individually and 20% for the banking sector as a whole. More conservative investors and those with other exposure to the property market should use lower limits.