This research identified several turnaround catalysts for NAB.

1. Stock Focus
National Australia Bank (NAB)
1
TEN REASONS WE RECOMMEND NATIONAL AUSTRALIA BANK
RECOMMENDATION : POSITIVE
VIEW
National Australia Bank Ltd (NAB) is our preferred exposure to the
major bank sector because it is attractively priced and has multiple
stock specific growth/turnaround options in a sector which
otherwise faces a challenging revenue growth outlook.
Following 1H11 reporting season, we upgrade our NAB share price
valuation from $30.27 to $31.12 and retain our Positive view.
We recommend investors switch out of Westpac Banking
Corporation Ltd (WBC) into NAB.
Ten reasons we recommend NAB are:
(i) Positive momentum in Australian Retail Banking.
(ii) Highly leveraged to expected recovery in business lending.
(iii) Sector leading revenue growth.
(iv) Sector leading cost-to-income ratio momentum.
(v) UK Banking merger and acquisition (M&A) options and
turnaround potential.
(vi) New Zealand turnaround potential.
(vii) Specialised Group Assets (SGA) recovery potential.
(viii) Bad debt expense decline potential.
(ix) Merger and acquisition (M&A) risk decline.
(x) Institutional investors have been underweight NAB.
Trading Data
Last Price $26.99
12 month range $22.72 - $27.84
Market Cap $58,429m
Free Float $58,429m (100%)
Avg. Daily Volume 6.7m
Avg. Daily Value $172.9m
12 month return (historical) 9.6%
Asset growth supported by NAB’s Personal
Banking price discounting strategy which
is driving above-system volume growth.
Margins are broadly stable with the impact
of NAB’s price discounting strategy being
offset by 18 basis points out-of-cycle
mortgage rate rise and less competition in
deposit pricing.
Earnings Forecasts
Yr to September 08A 09A 10A 11E 12E 13E
E&P Cash EPS (¢) 224.1 190.1 202.1 242.6 250.2 271.9
Basic Cash EPS (¢) 243.5 204.7 204.0 244.5 251.9 273.6
Reported EPS (¢) 262.7 123.4 202.1 242.6 250.2 271.9
E&P Cash EPS Growth (%) (17.1) (15.2) 6.3 20.0 3.1 8.7
DPS (¢) 194.0 146.0 152.0 166.6 188.2 211.3
Yield (%) 7.2 5.4 5.6 6.2 7.0 7.8
Grossed-Up Yield (%) 10.3 7.7 8.1 8.8 10.0 11.2
Franking (%) 100% 100% 100% 100% 100% 100%
E&P Cash Multiple (x) 11.1 13.2 13.2 11.0 10.7 9.9
Price/Book (x) 1.4 1.5 1.5 1.3 1.3 1.3
PEG Ratio (x) (1.2) 0.5 0.6 0.9
Net Interest Margin (%) 2.19 2.16 2.24 2.22 2.22 2.26
Return on Average Assets (%) 0.6% 0.5% 0.6% 0.7% 0.8% 0.8%
ROE (%) 11.6% 9.8% 10.9% 12.2% 12.1% 13.0%
Valuation (blended) 31.12
George Gabriel, CFA
ggabriel@evansandpartners.com.au
May 16, 2011
+61 3 9631 9853

2. 2
EXECUTIVE SUMMARY
National Australia Bank Ltd (NAB) is our preferred exposure to the Australian major bank sector because it is
attractively priced and has multiple stock specific growth/turnaround options in a sector which otherwise faces a
challenging revenue growth outlook. Following 1H11 reporting season, we upgrade our NAB share price valuation
from $30.27 to $31.12 and retain our Positive view.
We recommend investors switch out of Westpac Banking Corporation (WBC) into NAB.
Ten reasons we like NAB are:
(i) Positive momentum in Australian Retail Banking. NAB’s price/fee discounting strategy in
Australian retail banking has delivered positive results, with over two successive halves of growth in
Personal Banking’s cash earnings. Some margin decline has been offset by volume and market
share gain.
(ii) Leverage to a recovery in the business lending cycle. We calculate that NAB has a minimum
of 4.0% EPS upside if total system business lending increases by 10% from the current
level back to its Sep 08 peak of A$760bn. Given NAB has the greatest leverage to business lending,
we expect NAB to outperform as business loan volumes increase. Tables 1, 3.
(iii) Sector leading revenue growth. NAB is leading its peer group in revenue growth momentum,
driven by both the success of its retail bank price discounting strategy and turnaround in key
divisions such as UK Banking and Specialised Group Assets. Table 5.
(iv) Sector leading cost-to-income ratio momentum. NAB had the greatest improvement in 1H11
cost to income ratio of its peers. Table 6. NAB is also leading its peers in the “jaws” ratio (ie. the
rate of revenue growth less the rate of expense growth). Table 7.
(v) UK merger and acquisition (M&A) options and turnaround potential. UK Banking offers NAB
two upsides: (i) up to 4.7% EPS upside if UK Banking ROA recovers from 1H11 0.34% to
0.70%; and (ii) M&A options to either sell UK assets; or participate in sector consolidation, then
look to exit. NAB retains strategic flexibility in the UK and is prepared to be either a buyer or seller
of assets. Chart 3-4.
(vi) New Zealand turnaround potential. NAB NZ does not offer shareholders the same leverage to a
turnaround as the UK because NZ has already been generating a reasonably good return on assets.
ROA recovery to 1.05% (vs current 0.98%) implies 1.2% EPS upside. Chart 5.
(vii) Specialised Group Assets (SGA) recovery potential. SGA comprises $12.7bn of various assets
which are being run-off. Whilst difficult to accurately forecast future earnings of SGA, the key
drivers are positive. Both 2H10 and 1H11 showed underlying profit up; bad debt expense down;
and gross impaired assets down. Furthermore, SGA is highly leveraged to the economic outlook for
the US and UK, both of which are moving towards a cyclical recovery. Tables 10-11.
(viii) Bad debt expense decline potential. We believe bad debt normalisation will contribute to future
earnings growth given NAB’s 1H11 bad debt expense charge exceeded cross-cycle levels (adjusted
for current vs historical book mix). Furthermore, NAB was less reliant than peers on bad debt
expense decline for Group cash earnings growth. Table 12.
(ix) Merger and acquisition (M&A) risk decline. NAB has historically traded at a discount due to the
perceived risk of a large acquisition. This risk has now decreased substantially. After having its bid
for Axa Asia-Pacific refused by the Australian Consumer and Competition Commission (ACCC), CEO
Clyne has affirmed that NAB is no longer seeking transformational acquisitions and is instead
focused on incremental “bolt-on” acquisitions in Australia and the US.
(x) Institutional investors have been underweight NAB. The following historical reasons for
institutional underweight of NAB are now less valid: (1) Underperformance of Australian Personal
Banking; (2) The decision to invest in and the underperformance of Specialised Group Assets
(SGA); (3) Underperformance of UK Banking; and (4) M&A risks.

3. 3
(i) Positive momentum in Australian Personal Banking
NAB’s price/fee discounting and customer service strategy (“more give, less take” and “break up”
campaigns) in Australian retail banking is gaining positive momentum.
Investors have been sceptical that NAB has been buying market share at the cost of profitability, but over two
successive halves NAB has grown Personal Banking’s cash earnings. Table 1.
Personal Banking increased cash earnings by 1.4% in 1H11 half-on-half (“hoh”), with margin decline being offset
by volume growth:
 Margin decline. Personal Banking net interest margin (NIM) declined 6 basis points (bp) in 1H11 hoh to
2.22%. Table 2.
 Volume increase. Personal Banking gross loan balance growth of 9.7% in 1H11 outperformed both NAB
Group (up 2.5%) and Business bank (up 1.5%). Table 3.
 Market share increases. Personal Banking 1H11 housing lending market share increased to 13.8% from
12.8% in 1H10 and deposit shares increased from 13.4% to 14.1% (source: NAB).
TABLE 1: Divisional performance
Divisional Performance
Cash earnings (A$M) % 1H11 total 1H10 2H10 1H11 % 2H10 - 1H10 % 1H11 - 2H10
Business Banking 44.3% 1,095 1,098 1,181 0.3% 7.6%
Personal Banking 16.2% 317 426 432 34.4% 1.4%
Wholesale Banking 14.7% 403 302 393 -25.1% 30.1%
MLC & NAB Wealth 10.1% 263 285 269 8.4% -5.6%
NZ Banking 8.1% 202 214 215 5.9% 0.5%
UK Banking 4.6% 107 97 122 -9.3% 25.8%
Specialised Group Assets 2.9% -217 -45 77 79.3% 271.1%
Great Western Bank 1.8% 33 41 47 24.2% 14.6%
Corporate Functions 0.6% 58 56 17 -3.4% -69.6%
Other -3.2% -68 -86 -85 -26.5% 1.2%
Totals 100.0% 2,193 2,388 2,668 8.9% 11.7%
Cash earnings (A$M) Growth rates
Source: NAB, EAP
TABLE 2: Divisional net interest margin (NIM) performance
Divisional Performance
Net interest margin % (NIM) 1H10 2H10 1H11 1H11 - 2H10
Group 2.26 2.24 2.23 -0.01
Business banking 2.51 2.50 2.57 0.07
Personal banking 2.34 2.28 2.22 -0.06
NZ banking 2.08 2.24 2.24 0
UK banking 2.40 2.28 2.33 0.05
Great Western Bank 4.06 3.99 4.38 0.39
Source: NAB, EAP

4. 4
TABLE 3: Volume increases
Gross loans and acceptances (A$M) 1H10 2H10 1H11
Group (A$M) 434.5 448.0 459.2
% growth 3.1% 2.5%
Personal bank (A$M) 104.3 112.6 123.5
% growth 8.0% 9.7%
Business bank (A$M) 184.8 188.4 191.3
% growth 1.9% 1.5%
Source: NAB, EAP
(ii) Leverage to a recovery in the business lending cycle
We estimate that NAB has at least 4.0% EPS upside if total system business lending increases by 10%
from the current aggregate of A$682bn to the Sep 08 peak of A$760bn.
NAB is highly leveraged to business lending, with 22.4% overall market share and comprising 44.3% of 1H11 cash
earnings. Accordingly, we expect NAB to outperform as business lending volumes increase. Tables 1,3,4.
We expect business lending growth to pick up in FY11-12 given system volume decline appears to have stabilized
in Feb and Mar 2011. Charts 1-2. Furthermore, recent guidance from the major banks is:
 NAB expects business credit growth of 7-9% in FY12. NAB economists forecast FY12 10% growth.
 WBC expects overall credit growth of 5-6% in FY12F, with 7% housing and 4-6% business credit growth.
EAP forecasts 3% 2H12F business lending growth for NAB, so upside exists if system growth recovers.
TABLE 4: Market shares
Market shares (%) ANZ CBA NAB WBC SUN BEN BOQ Totals
Owner occupied 15.9 29.0 15.5 27.1 2.9 1.7 1.4 93.5
Investor 13.7 28.9 16.3 27.2 2.7 2.5 2.5 93.8
Housing total 15.3 29.0 15.7 27.1 2.8 1.9 1.7 93.5
Credit card 20.6 25.4 13.3 23.8 0.0 0.7 83.8
Other personal 21.2 14.8 26.8 22.1 1.0 3.8 0.4 90.1
Personal total 21.0 18.7 21.8 22.8 0.6 2.7 0.3 87.9
Business total 16.9 18.3 22.4 14.8 3.8 1.8 1.2 79.2
Source: APRA, EAP
CHART 1: NAB Business lending growth relative to system
-20%
-10%
0%
10%
20%
30%
40%
50%
Annualized%Growth
NABBusiness Lending Growth
NABMonthlyBusinessLendingGrowth
(Annualized)
SystemMonthlyGrowth(Annualized)
Source:RBA,APRA
Source: APRA, EAP

5. 5
CHART 2: System lending growth – business lending
-18.0%
-9.0%
0.0%
9.0%
18.0%
27.0%
36.0%
-$80,000
-$40,000
$0
$40,000
$80,000
$120,000
$160,000
2003 2004 2005 2006 2007 2008 2009 2010
millions
System Business Lending Growth
$ change (LHS)
% change (RHS)
Source: APRA
Source: APRA, EAP
(iii) Sector leading revenue growth
Given the sector’s challenging revenue growth outlook, we prefer bank stocks with existing revenue
momentum and stock specific revenue growth drivers such as NAB.
NAB’s revenue momentum leads the sector, with 4.7% revenue growth in 1H11. Table 5.
TABLE 5: Sector revenue growth
Revenue growth (%) 2H10 1H11
ANZ 3.3% 4.0%
CBA -2.9% 3.0%
NAB 2.0% 4.7%
WBC -2.9% 0.2%
Average -0.1% 3.0%
Source: APRA, EAP
NAB also has a range of stock specific revenue drivers, including:
 High leverage to a cyclical recovery in business lending volumes. Chart 2.
 Leverage to a cyclical recovery in the UK and New Zealand. Charts 4, 5.
 Turnaround momentum in Specialised Group Assets (SGA). Tables 10, 11.
(iv) Sector leading cost-to-income ratio momentum
Given banks currently operate in a low-growth, commodity segment (ie. the ultimate commodity is
money), our preferred exposure is to low cost producers. On this basis, we prefer NAB because it
exceeds its peer group on both cost/income ratio momentum and revenue/expense growth rates.
Cost-to-income (CTI) ratio momentum
NAB had the sector’s highest decrease in the CTI ratio in 1H11, down 2.3%. Table 6.

6. 6
TABLE 6: Cost to income ratios
Cost to income ratio (%) 2H10 1H11
ANZ 45.3% 45.3%
NAB 47.6% 45.4%
WBC 44.7% 43.8%
CBA 46.7% 46.2%
Change in CTI (absolute) 2H10 1H11
ANZ 0.9% 0.0%
NAB 0.8% -2.3%
WBC 1.7% -0.9%
CBA 2.0% -0.6%
Source: EAP, major banks
Leading “jaws” performance
NAB leads the sector in the 1H11 revenue/expense growth rate (ie. “jaws”) in both the absolute value of 5.0% and
the percentage turnaround from 2H10. Table 7.
NAB compares favourably to ANZ’s negative 1H11 jaws as ANZ invests in its Asian businesses in anticipation of
revenue growth. EAP prefers exposure to banks with existing positive jaws momentum (ie. NAB) and prefers to
avoid ANZ whilst it has flat/negative jaws performance. Table 7.
TABLE 7: Major bank “jaws”
Jaws (%) 2H10 1H11
ANZ -2.2% -0.1%
NAB -1.6% 5.0%
WBC -3.8% 2.1%
CBA -4.4% 1.3%
Source: EAP, major banks. Note: “Jaws” is the difference
between the rate of revenue growth and the rate of cost growth.
(v) UK Banking M&A options and turnaround potential
NAB UK Banking’s cash earnings have been quite volatile and remain cyclically depressed. We believe
UK Banking could provide up to 4.7% EPS upside in a cyclical recovery. Charts 3, 4.
Upsides
UK Banking could achieve earnings upside through either a cyclical improvement in NAB’s return on assets (ROA)
or merger and acquisition (M&A) activity.
 ROA recovery to 0.7% implies 4.7% EPS upside. NAB UK’s ROA has recently ranged from 0.18% (2009) to
0.88% (2006), and is currently 0.34%. Chart 4. This compares to NAB Group 1H11 ROA of 0.78% and NZ
Banking 1H11 ROA of 0.98%. Chart 5.
 UK merger and acquisition (M&A) options include the sale of NAB’s UK banks Clydesdale and Yorkshire or
acquisition/consolidation of other UK financial organisations followed by eventual sale of the merged group.

7. 7
CHART 3: NAB UK Banking’s cash earnings CHART 4: NAB UK Banking’s Return on Assets (ROA)
518
592
542
164
204
244
0
100
200
300
400
500
600
700
2006 2007 2008 2009 2010 1H11 ann'd
UKcashearnings(A$M)
0.88%
0.82%
0.69%
0.18%
0.27%
0.34%
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
0.80%
0.90%
1.00%
2006 2007 2008 2009 2010 1H11 ann'd
ROA
Source: EAP, NAB Source: EAP, NAB
NAB’s UK Banking
NAB’s UK Banking businesses Clydesdale and Yorkshire are winning market share and expanding their net interest
margin; however, impaired asset growth continues.
 Margin increased by 5bp to 2.33% in 1H11.
 Volumes.
o Mortgages. NAB’s mortgage lending volumes of 2.4% was above system growth of 0.3% (source:
Bank of England - Feb 2011).
o Business lending. NAB’s business lending volumes declined 1.1%, which compares favourably to the
4.4% contraction in the overall market (Source: Bank of England – Dec 2010).
 Impaired asset ratio (impaired/gross loans) has increased from 2.34% in 2H10 to 2.66% in 1H11, driven
by challenging economic conditions, particularly within the commercial property, construction and
hospitality sectors. This was matched by an increase in total provisions/gross loans from 1.46% in 2H10 to
1.52% in 1H11.
UK economic outlook
The UK faces low growth, high unemployment and weak credit growth as the economy re-balances away from
consumer and public spending toward exports and business investment. We expect these structural changes will
take some years to achieve.
 GDP growth.
o FY10 GDP growth was 1.3%, but contracted 0.5% in fourth quarter of 2010, apparently driven
mostly by unusually extreme cold in Dec 2010. The outlook remains subdued, with 2011 forecast
consensus UK GDP growth of 1.7% (source: NAB).
o NAB expects 2011 UK GDP growth of 1.8% whilst government austerity measures take effect and
then 2.2% in 2012.
o The Bank of England forecasts 1.7% growth in 2011 (in line with the independent Office for Budget
Responsibility) and 2.2% in 2012 (below the OBR’s 2.5% forecast) (source: AFR, 13 May 11).
 Unemployment was 7.8% in Feb 11; had been mostly flat through 2010 and NAB expects it to remain flat
in the near term.
 The housing market remains subdued with prices relatively flat and expected to remain flat in the near-
term. Commercial property prices are stable, but remain well below their June 2007 peak. However, there
are marked regional variations, with London in particular showing improvement.
 Inflation remains above the Bank of England (BOE) target, with March quarter Consumer Price Index (CPI)
of 4.0%. CPI has exceeded the 2% BOE target by at least 1% for 16 months.
UK regulatory context
 UK Bank Levy. NAB’s UK operations will be subject to the Bank Levy in FY11. However, the relevant
legislation has not yet been enacted, and the charge will not be incurred until the end of Sep 11. NAB
expects the charge to be about £4m based on the current legislation.

8. 8
 Corporate tax rate. The March 2011 budget announced that the corporate tax rate will decrease by 2% (to
26% in FY12 and 23% in FY15) rather than the previously announced 1%. This will impact deferred tax
assets and liabilities, resulting in a slight cash earnings benefit.
(vi) New Zealand turnaround potential
New Zealand is continuing its slow recovery from recession. Its economy currently lies between
Australia (high commodity prices supporting exporter income) and the UK (ongoing softness in
spending and housing). However, NAB NZ does not offer shareholders the same degree of leverage to a
turnaround as the UK because NZ has already been generating a reasonably good return on assets
(Chart 5), with some net interest margin expansion in 2H10 (Table 8) and the cost to income ratio has
declined from 44.8% in 1H10 to 42.7% in 1H11.
Upsides
Key sensitivities are:
 Return on Assets (ROA) recovery to 1.05% implies 1.2% EPS upside. NAB NZ ROA has recently ranged
from 0.91% (2009) to 1.13% (2004). Chart 5. This compares to Group 1H11 ROA of 0.78% and UK 1H11
ROA of 0.34%. Chart 4.
 Net interest margin. Every 5 basis point (bp) net interest margin (NIM) increase translates to a 0.3% EPS
increase. NAB was the only bank not to record a NIM increase in New Zealand in 1H11, which suggests
future upside risk. Table 8.
 Volume. Gross loans have been steadily falling in NZ since 1H10. Every A$1bn lending increase translates
to 0.4% EPS increase. Table 9.
CHART 5: New Zealand Banking Return on Assets (ROA)
1.13%
1.03% 1.01%
1.05% 1.05%
0.91% 0.91%
0.98%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
2004 2005 2006 2007 2008 2009 2010 1H11 ann'd
ROA
Source: EAP, major banks
TABLE 8: New Zealand (NZ) net interest margin trends
NZ NIM (%) 1H10 2H10 1H11 1H11 - 2H10
ANZ 2.20 2.33 2.35 0.02
CBA 1.59 1.64 1.92 0.28
NAB 2.08 2.24 2.24 0
WBC 2.07 2.16 2.29 0.13
Average 1.99 2.09 2.20 0.11
Source: EAP, major banks

9. 9
Volumes
Total New Zealand system credit has been largely flat since late 2009, with a mild increase in household credit
offsetting de-leveraging by the non-farming business sector. The volume outlook is flat:
 Business lending (approx. 40% of total), seems to have stabilised after falling through much of 2010.
 Household lending (approx. 60% of total) remains slightly positive, though low by historical standards.
However, despite improving GDP growth expectations, businesses continue de-leveraging.
TABLE 9: New Zealand (NZ) gross loan trends
NZ gross loans (A$M) 1H10 2H10 1H11
NZ gross loans 42,642 42,129 41,335
% growth -1.2% -1.9%
Total NAB gross loans 434,476 447,981 459,246
% growth 3.1% 2.5%
NZ/total NAB gross loans 9.8% 9.4% 9.0%
Source: EAP, major banks
NZ economic outlook
NAB expects NZ’s GDP growth to be 1.4% in 2011 (heavily influenced by one-off events such as the Christchurch
earthquake and the Rugby World Cup) and 3.6% in 2012.
 Interest rates. In March 2011, the Reserve Bank of New Zealand (RBNZ) reacted to the Christchurch
earthquake by cutting the Official Cash Rate (OCR) by 0.50% to 2.50% as an “insurance” or “emergency”
cut which would be reversed as soon Christchurch’s recovery had settled down.
 Unemployment. Although NZ’s current 6.8% unemployment rate is below the 7.0% Dec 09 peak, it exceeds
the 4.0% trough of 2007-08.
(vii) Specialised Group Assets (SGA) recovery potential
SGA comprises $12.7bn of various assets which are being run-off by NAB. Whilst it is not possible for
analysts to accurately forecast the return profile of SGA (given its opacity and number of moving
parts), the key point is that SGA is in an uptrend over the two most recent halves on key metrics and
underlying drivers. Cash earnings are up, bad debt expenses are down, gross impaired assets are down
and the UK and US economies (which are key drivers of SGA) and are moving towards a cyclical
recovery. Tables 10, 11.
NAB says “In the past six months, there has been some indication that the rate of credit deterioration of SGA
assets has decreased, but performance remains highly dependent upon the recovery of the economies to which the
portfolios are exposed”.
Key points are:
 Geographic mix. 57% of exposures to the UK/Europe; 28% to Nth America; 8% to Aust/NZ and Other 7%.
 Portfolio mix. Portfolios most vulnerable to adverse economic conditions are Leverage Finance UK;
Commercial Property UK and Corporate UK. Specific provisions in 1H11 were mostly in these categories.
Table 11.
 Turnaround. The 1H11 cash earnings increase was driven by mark-to-market gains and a reduced bad debt
expense charge. The underlying profit trend has improved each year since 1H10. Table 10.

10. 10
TABLE 10: SGA earnings summary
1H10 2H10 1H11
Net operating income -108 18 139
Operating expenses -27 -24 -24
Underlying profit -135 -6 115
Bad debt expense -173 -95 -21
Profit before tax -308 -101 94
Income tax expense 91 56 -17
Cash earnings -217 -45 77
Source: EAP, major banks
TABLE 11: SGA assets summary
Asset % total
Value
(A$bn)
Provision
(A$M)
Provision
(%)
Average
tenor (yrs)
Leverage Finance UK 8.7% 1.1 98 8.9% 3.9
Commercial property UK 7.9% 1 133 13.3% 1.3
Structured Asset Finance UK 13.4% 1.7 26 1.5% 14.2
Corporate & Non-Bank Fin. Inst. Lending UK11.8% 1.5 6 0.4% 2
Infrastructure Finance USA 3.1% 0.4 0 0.0% 8.4
PE & Real Estate Investment Funds USA 6.3% 0.8 0 0.0% 0.6
Corporate Lending USA 2.4% 0.3 48 16.0% 1.8
Subtotal - loans 6.8 311 4.6%
Structured Asset Management 38.6% 4.9 190 3.9% 12.7
Credit Wrapped Bonds 7.9% 1 1 0.1% 5.2
Subtotal - hold to maturity assets 5.9 191 3.2%
Total Assets 100.0% 12.7 502 4.0%
Source: EAP, NAB
(viii) Bad debt expense decline potential
In our view, bad debt normalisation will contribute to NAB’s earnings growth through to FY12 given
NAB’s 1H11 bad debt expense charge exceeded cross-cycle levels (adjusted for current vs historical
loan book mix).
Bad debt decline not a driver for NAB 1H11 result
NAB was less reliant than peers on bad debt expense decline for Group cash earnings growth in 1H11. NAB’s bad
debt expenses only declined 4.4% in 1H11, vs an industry average of -7.1%. Table 12.
TABLE 12: Bad debt expense summary
1H10 2H10 1H11
NAB bad debt charge (A$M) 1,230 1,033 988
WBC bad debt charge (A$M) 879 577 463
ANZ bad debt charge (A$M) 1,098 722 660
CBA bad debt charge (A$M) 1,383 692 722
NAB -16.0% -4.4%
WBC -34.4% -19.8%
ANZ -34.2% -8.6%
CBA -50.0% 4.3%
Source: EAP, NAB

11. 11
Bad debt expense decline outlook
We believe NAB retains scope for continued bad debt expense decline through FY12 given its bad debt expense
charge remains above mid-cycle levels.
 NAB’s 1H11 bad debt expense/gross loans of approx. 0.44% (annualised) was consistent with its historical
average.
 However, the 0.44% historical average overstates NAB’s cross-cycle bad debt expense outlook because the
loan book mix has shifted towards mortgages from approx. 25% in the early 1990s to approx. 51%
currently.
 We estimate that the current loan book mix could result in a cross-cycle bad debt charge of approx. 30bp.
This represents up to 8.5% EPS upside risk to our base case cross-cycle forecasts given we have
maintained a cross-cycle bad debt assumption of approx. 0.40%.
 Furthermore, even if the changed asset mix (vs historical) does not drive the bad debt expense charge
lower across the cycle, NAB is expected to enjoy a lower than average bad debt charge in FY12 and FY13
given bad debts tend to be below cross-cycle averages in 8 out of 10 years (ie. the median is below the
average).
 Finally, NAB’s provisioning coverage looks adequate relative to mid-cycle loss rates.
Asset quality trends
Asset quality has slightly deteriorated across the sector, with impaired loans rising for all banks except ANZ from
2H10 to 1H11 (ANZ 1.66% to 1.38%; WBC 0.95% to 0.98%; NAB 1.35% to 1.37%).
NAB’s Australian impaired loans were relatively stable in 1H11; higher in NZ and much higher in the UK.
 Business Banking impaireds increased 8 basis points (bp) due to pressure in small to medium enterprises
(SME) and property.
 Personal Banking is performing well, with a decrease of 2 bp.
 NZ Banking increased by 12 bp mainly due to rising stressed business loans.
 UK Banking increased 31 bp to 2.65%, driven by the commercial property, construction and hospitality
sectors.
NAB’s asset quality commentary
“Trends in the performance of system asset quality across key markets follow a similar geographic pattern.
Australia has seen the best asset quality outcomes among key Group markets, with a system impaired loan ratio
of just over 1% in late 2010. While above the 20 basis points seen prior to the crisis, it is far below the level seen
in the early 1990s recession. The reduction in the inflow of newly impaired assets into Australian banks in late 2010
and the drop in the stock of all impaired assets both point to an improvement in the system credit quality through
the course of 2010.
System credit quality elsewhere is generally weaker.
Business credit quality has worsened in the UK but given the magnitude of its recession, the deterioration has not
been as bad as expected and far better than the bad debt levels of the early 1990s. Bank write-off ratios for
corporate lending have risen and the corporate insolvency rate has climbed slightly but both have remained well
below the peaks seen in that recession. System mortgage lending write-offs have stayed remarkably low given the
scale of the downturn in the UK housing market but system unsecured credit quality has deteriorated significantly
since 2007.
Asset quality has also deteriorated in New Zealand with the system impaired loan ratio rising from around 20
basis points in 2007 to around 150 basis points in mid-2010. The quarterly bank reporting returns point to a further

12. 12
small rise in bad debt ratios continuing into the latter half of the year. As in Australia, however, the impaired loan
ratio falls well short of the early 1990s experience.
The US has seen by far the worst asset quality with the bank loan delinquency ratio standing well above the level
seen in the last recession, which mainly reflects the 10% delinquency ratio recorded for home mortgages.
With unemployment likely to remain high in the US for some years and the housing market still weak, system
bad debt ratios look set to remain high”. (source: NAB).
(ix) M&A risk decline
NAB has traded at a peer-relative discount due to perceived acquisition risk. We believe this is not
warranted given CEO Clyne has repudiated transformational M&A following the ACCC’s denial of NAB’s
bid for Axa Asia Pacific.
CEO Clyne said at the 1H11 results:
“M&A is not an active area for the group. We will continue to look at small bolt-ons in the U.S., if they emerge in
the right geographic and price construct. We’ll continue our small direct investments in direct asset management.
In the U.K., we will continue to monitor the market.”
(x) Market is underweight
Institutional investors have been underweight NAB and we expect this to reverse over time.
Institutional investors have historically been underweight NAB for the following 4 reasons: (1) Underperformance of
Australian Personal Banking; (2) The decision to invest in and the underperformance of Specialised Group Assets
(SGA); (3) Underperformance of UK Banking; and (4) M&A risks.
Addressing each point in order, we believe:
1. NAB is positively addressing Personal Banking through its price discounting strategy. Recent earnings
momentum supports our view. Table 1.
2. SGA is in run-off and the key drivers of the UK and US economic outlooks are cyclically positive. Table 1.
3. UK Banking is experiencing positive earnings momentum. Table 1. However, some investors may retain
lingering concerns regarding the ambiguity of NAB’s UK “M&A options”. In our view, NAB’s cautious
commentary on M&A indicates a reluctance to undertake transformational M&A in the UK, unless earnings
accretive acquisitions were available. We believe NAB would exit the UK if a fair price was achievable.
4. M&A risks have declined. Management has reiterated that “M&A is not a focus of the group”, that it is
monitoring its UK options and that only “bolt-on” acquisitions in the USA will be considered.
The consensus analyst recommendation on NAB before the 1H11 results was “Hold”, and this has been upgraded to
“Buy” after the results. Table 13 summarises the changes in analyst recommendations.
TABLE 13: NAB analyst recommendations
5-May 9-May
Buy 7 13
Hold 8 3
Sell 2 1
Total 17 17
Source: EAP, Bloomberg

13. 13
FINANCIAL SUMMARY
National Australia Bank NAB
As at: 16/05/2011 Recommendation: Positive Share Price $26.99
Year end September 2010A 2011E 2012E 2013E
INCOME STATEMENT
Interest Income $m 29,824 34,736 38,822 43,516
Interest Expense $m (17,568) (21,897) (25,504) (29,491)
Net Interest Income $m 12,256 12,839 13,318 14,025
Non Interest Income
Fees & Commissions $m 2,587 2,561 2,560 2,691
Trading Income $m 100 268 268 268
Other Banking Income $m 0 0 0 0
Banking Non Interest Income $m 2,687 2,829 2,828 2,959
Wealth Management Income $m 1,512 1,810 1,952 2,113
Income/(Loss) from Associates $m 0 0 0 0
Total operating income $m 17,008 18,279 19,099 20,097
Operating Expenses
Personnel Expenses $m (4,644) (4,868) (5,015) (5,166)
Occupancy & Equipment $m (592) (583) (601) (619)
Total Operating Expenses $m (8,541) (8,993) (9,221) (9,490)
Pre Prov. Oper. Profit Before Tax $m 8,467 9,285 9,878 10,607
Bad debt charge $m (2,791) (2,135) (2,220) (1,968)
Pre Tax Profit $m 5,676 7,151 7,658 8,639
Tax Expense $m (1,451) (2,012) (2,144) (2,419)
Minorities $m (1) 0 0 0
Reported Profit Statutory $m 4,224 5,139 5,514 6,220
Cash earnings adjustment $m 0 0 0 0
Reported Cash Profit $m 4,224 5,139 5,514 6,220
Preference Share Dividends $m (38) (38) (38) (38)
E&P Normalised NPAT $m 4,186 5,101 5,476 6,182
E&P Cash EPS ¢ 202.1 242.6 250.2 271.9
Basic Cash EPS ¢ 204.0 244.5 251.9 273.6
Reported EPS ¢ 202.1 242.6 250.2 271.9
Dividend per Share ¢ 152.0 166.6 188.2 211.3
BALANCE SHEET
Gross Loans & Other Receivables $m 359,109 413,519 434,632 456,929
Total Assets $m 685,952 725,774 754,807 785,222
Impaired Assets $m 6,048 5,814 5,645 5,439
Deposits & Other Pub. Borrowing $m 353,232 378,091 395,369 413,585
Bonds, notes & subordinat’d debt $m 93,203 93,203 93,203 93,203
Total Shareholder Equity $m 38,954 44,346 46,498 48,574
Avg housing loans $m 213,069 230,936 243,443 256,674
Avg non-housing loans $m 172,250 175,634 183,232 191,838
Avg total gross loans $m 385,319 406,570 426,675 448,512
Avg Interest Earning Assets $m 546,584 578,500 598,605 620,442
Avg Total Assets $m 666,062 704,955 729,454 756,065
Avg Interest Bearing Liabilities $m 497,490 508,821 525,217 542,961
Avg Total Liabilities $m 627,505 663,305 684,032 708,529
Avg Shareholders’ Equity $m 38,557 41,650 45,422 47,536
GROWTH RATES
Per Share
E&P Cash EPS % 6.3% 20.0% 3.1% 8.7%
Basic Cash EPS % (0.3)% 19.8% 3.0% 8.6%
Dividend Per Share % 4.1% 9.6% 12.9% 12.3%
Profit & Loss
Net Interest Income % 1.6% 4.8% 3.7% 5.3%
Banking Non Interest Income % (27.7)% 5.3% 0.0% 4.6%
Wealth Management Income % 41.6% 19.7% 7.8% 8.2%
Total Non Interest Income % (27.7)% 5.3% 0.0% 4.6%
Total Operating Income % 1.4% 7.5% 4.5% 5.2%
Operating Expenses % 7.0% 5.3% 2.5% 2.9%
Pre-Provision Profit % (3.8)% 9.7% 6.4% 7.4%
Impairment Charges % (26.8)% (23.5)% 4.0% (11.3)%
Cash Profit % 10.0% 21.7% 7.3% 12.8%
Balance Sheet
Gross Loans & Other Receivables % 2.8% 15.2% 5.1% 5.1%
Total Shareholders’ Equity % 3.0% 13.8% 4.9% 4.5%
Average Balance Sheet
Housing Loans % 6.3% 8.4% 5.4% 5.4%
Non-Housing Loans % (7.0)% 2.0% 4.3% 4.7%
Avg Interest Earning Assets % (2.3)% 5.8% 3.5% 3.6%
Avg Interest Bearing Liabilities % (5.3)% 2.3% 3.2% 3.4%
Year end September 2010A 2011E 2012E 2013E
VALUATION METRICS
E&P Cash P/E Multiple x 13.2 11.0 10.7 9.9
Basic P/E Multiple x 13.4 11.1 10.8 9.9
Price/Pre-prov. operating profit x 6.8 6.2 6.1 5.9
NTA per share $ 14.9 16.9 17.0 17.1
Book Value per Share $ 18.3 20.7 20.8 20.9
Price/NTA x 1.8 1.6 1.6 1.6
Price/Book x 1.5 1.3 1.3 1.3
Dividend per Share ¢ 152.0 166.6 188.2 211.3
Dividend Payout Ratio x 0.8 0.7 0.8 0.8
Dividend Yield % 5.6% 6.2% 7.0% 7.8%
Grossed Up Yield % 8.1% 8.8% 10.0% 11.2%
Issued Shares m 2,133.3 2,146.2 2,232.9 2,317.8
Weighted Average Shares m 2,122.8 2,146.2 2,232.9 2,317.8
PERFORMANCE ANALYSIS
Profitability
Income / Avg Assets % 2.6% 2.6% 2.6% 2.7%
Expense / Avg Assets % 0.2% 0.3% 0.3% 0.3%
Return on Average Assets % 0.6% 0.7% 0.8% 0.8%
Return on Ordinary Equity % 10.9% 12.2% 12.1% 13.0%
Return on Risk Weighted Assets % 1.2% 1.4% 1.4% 1.5%
Net Interest Margin Analysis
Net Interest Spread % 1.9% 1.7% 1.6% 1.6%
Net Interest Margin % 2.24% 2.22% 2.22% 2.26%
Non Int. Income to Total Income % 27.9% 29.8% 30.3% 30.2%
Efficiency
Cost/Income % 50.2% 49.2% 48.3% 47.2%
Tax Rate
Effective tax rate % 25.6% 28.1% 28.0% 28.0%
CAPITAL ADEQUACY
Risk Weighted Assets $m 344,658 374,512 393,633 413,827
Tier 1 Capital $m 30,693 35,953 38,576 41,383
Total Capital $m 39,170 47,188 50,385 53,798
Tier 1 Ratio % 8.9% 9.6% 9.8% 10.0%
Tier 2 Ratio % 2.5% 3.0% 3.0% 3.0%
Total Capital Ratio % 11.4% 12.6% 12.8% 13.0%
ACE Ratio % 6.8% 7.7% 7.9% 8.2%
Tangible Leverage Ratio % 4.6% 5.0% 5.0% 5.0%
ASSET QUALITY
90-day Past Due Loans $m 2,366 2,274 2,208 2,128
Non Performing Loans $m 6,048 5,814 5,645 5,439
NPL / Gross Loans and Other Rec % 1.7% 1.4% 1.3% 1.2%
Total Provisions $m 4,274 4,183 4,239 4,332
Total Prov. / Gr. Loans & Oth Rec % 1.2% 1.0% 1.0% 0.9%
Individual Provision $m 1,409 1,354 1,315 1,267
Individual Provision Cover % 23.3% 23.3% 23.3% 23.3%
Collective Provision $m 2,865 2,829 2,924 3,065
Collective Prov. / Perform. Loans % 0.8% 0.7% 0.7% 0.7%
Impairment Charges / Avg RWA % 0.8% 0.6% 0.6% 0.5%
Imp Assets / Gr. Loans & Oth Rec % 1.7% 1.4% 1.3% 1.2%
Impaired asset coverage % 23.3% 23.3% 23.3% 23.3%
Collective Provision / RWA % 0.8% 0.8% 0.7% 0.7%
BDD / Gr. loans and Oth Rec % 0.8% 0.5% 0.5% 0.4%
WEALTH MANAGEMENT
Funds Under Administration $m 91,460 102,327 111,521 121,417
Inforce Premiums $m 1,190 1,465 1,589 1,740
Funds Mgt Revenue Margin % 1.1% 1.1% 1.1% 1.1%
Life Insurance Revenue margin % 42.4% 43.9% 44.0% 44.0%
Shareholder Invest. Returns % 0.0% 0.0% 0.0% 0.0%

14. 14
RESEARCH RECOMMENDATION DEFINITIONS
Positive Stock is expected to outperform the S&P/ASX 200 over the coming 24 months
Neutral Stock expected to perform in line with the S&P/ASX 200 over the coming 24 months
Negative Stock is expected to underperform the S&P/ASX 200 over the coming 24 months
Speculative Stock has limited history from which to derive a fundamental investment view or its prospects
are highly dependent on event risk, eg. Successful exploration, scientific breakthrough, high
commodity prices, regulatory change, etc.
Suspended Stock is temporarily suspended due to compliance with applicable regulatory and/or Evans &
Partners policies in circumstances where Evans & Partners is acting in an advisory capacity.
Not Rated Stock is not included in our investment research universe.
Research Criteria Definitions
Recommendations are primarily determined with reference to how a stock ranks relative to the S&P/ASX 200 on
the following criteria:
Valuation Rolling 12 month prospective multiples (composite of Price-to-Earnings Ratio, Dividend
Yield and EV/EBITDA), or long-term NPV for resource stocks.
Earnings Outlook Forecast 2 year EPS growth.
Earnings Momentum Percentage change in the current consensus EPS estimate for the stock (rolling 1 year
forward basis) over the consensus EPS estimate for the stock 3 months ago.
Shareholder Returns Composite of forecast ROE (rolling 1 year forward basis) and the percentage change in
ROE over 2 years.
Debt Servicing Capacity Rolling 12 month EBIT Interest Cover ratio.
Cyclical Risk Qualitative assessment of the 2 year outlook for a stock/industry’s profit cycle.
Industry Quality Qualitative assessment of an industry’s growth/returns potential and company specific
management capability.
Financial Transparency If we don’t understand it, we won’t recommend it.
For stocks where Evans & Partners does not generate its own forecasts, Bloomberg consensus data is used.
Analysts can introduce other factors when determining their recommendation, with any material factors stated in
the written research where appropriate.

15. 15
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