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New CEO will struggle to lift NAB profits for shareholders

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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.

Ross McEwan will take over as NAB CEO no later than April 2020, but it's difficult to see how he can change the bank's profitability problems.

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.

These are key reasons why the pair are more profitable than NAB and ANZ and it's difficult to see how McEwan can change that.

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.

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Rakesh Tummala is a senior analyst at Intelligent Investor (under AFSL 282288), owned by InvestSMART Group Limited. Rakesh started his career as junior analyst at Intelligent Investor. He since had roles as bank and insurance analyst, and rejoined the team in 2018. Rakesh covers financial services including banks and insurers. He has degrees in finance and economics from UNSW. To unlock Intelligent Investor stock research and buy recommendations, take out a 15-day free membership.
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