Why one top fund manager likes NAB shares, despite preferring other sectors

In an article released by top fund manager Firetrail Investments yesterday, analyst Scott Olsson discusses the Australian banks and the current economic outlook.

What is the outlook for the Australian Banks?

According to Olsson, the banks’ recovery from the current crisis will happen slowly, as they face headwinds such as coronavirus-induced bad debts, a slow economy and low interest rates. These factors combined will lead to a lower return on equity for the banks.

However, he believes that the days of the big four offering 5–6.5% dividend yields will return, given their “formidable franchises”.

Olsson also suggests that while the banks have made provisions for bad debts, there is likely to be additional bad debts for the next 1–2 years. He believes that bad debts will return to mid-cycle levels in 2022 to 2023, which will drive an earnings recovery.

He suggests that he would be a buyer of banks in a scenario that was more favourable, with much lower bad debts than anticipated. However, he stated that even in a more favourable scenario, other sectors and other stocks will be better performers than the banks. 

Which bank would the analyst buy?

According to Olsson, of the major banks Firetrail Investments prefers National Australia Bank Ltd. (ASX: NAB). This is for a number of reasons, including the current management team.

In the interview, Olsson stated:

We really like the CEO and Chairman combo of Ross McEwan and Phil Chronican – they bring a lot of experience which you want going through a crisis like this…The new CEO, I think he’s going to bring a lot of accountability to the business and pull out a lot of unnecessary costs. And when you’re looking medium-term, I think there’s an opportunity for him to improve the retail franchise. So we like the NAB story.

Olsson did suggest that NAB is “very overweight” on small to medium enterprises and will have higher bad debt losses than the other banks. However, he believes that following its capital raising, NAB now has the capital position to deal with these debts.

About the NAB share price 

NAB was formed via a merger in 1982 and is now Australia’s third largest bank by market capitalisation.

In May, NAB raised $1.25 billion from investors through a share purchase plan at a price of $14.15 per share. It raised $3 billion from institutional shareholders at the same price in April.

In the half year to March 2020, NAB had net profit after tax of $1.31 billion and net interest income of $6.89 billion.  

The NAB share price is down 1.33% on Friday to $17.82. It is up 35% from its 52 week low of $13.20 reached in March. The NAB share price is down 27% since the beginning of January.

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• Why NAB and Telstra shares could be top options for income investors

Motley Fool contributor Chris Chitty has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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