2022 was strong for the NAB share price. What’s next?

The National Australia Bank Ltd (ASX: NAB) share price managed to significantly outperform the S&P/ASX 200 Index (ASX: XJO) in 2022.

Last year, the ASX 200 fell by around 7%, while NAB shares managed to deliver a positive gain of around 4%.

How did the bank manage to deliver a positive performance? I’d suggest it may have been down to two key things.

Positive run in 2022

A key factor for the performance of the ASX bank share segment of the market is interest rates.

The main profit generator for the Australian banking sector is lending. A change in the central bank interest rate can have widespread impact on the economy.

There were several interest rate rates by the Reserve Bank of Australia (RBA) last year. The interest rate jumped from 0.1% to 3.10%.

The lower official interest rate hurt bank lending margins, meaning their profitability was reduced. So, it would be logical for investors to think that higher interest rates can help lending margins.

NAB said that in the second half of its FY22, it had a net interest margin (NIM) of 1.67%. But, the fourth quarter NIM was 1.72%, up 10 basis points on the third quarter. This could be promising for short-term profitability.

Another factor that I think helped the ASX bank share in 2022 was that management has done a good job at turning the bank around and achieving growth.

In the FY22 report, the company reported cash earnings growth of 8.3% to $7.1 billion. Excluding the Citi consumer business acquisition, revenue rose 7.8%, mainly reflecting higher volumes with growth of 7.3% (with housing lending up 5.6% and non-housing lending up 9.6%).

NAB shares finished the 2022 financial year well capitalised, with a common equity tier 1 (CET1) ratio of 11.51%.

What could 2023 bring for the NAB share price?

The NAB CEO Ross McEwan referred to keeping “strong balance sheet settings”. McEwan said when he delivered the bank’s FY22 result:

Maintaining these settings is important during the current economic uncertainty, with higher interest rates and higher inflation likely to challenge some customers. However, strong employment conditions along with substantial household and business savings give us confidence in the resilience of our customers and the broader economy.

Our strategy is long term, and is not dependent on any particular operating environment or economic conditions. It is centred around an enduring ambition to improve the outcomes for our customers and colleagues. We have made good progress over the past two years which positions us well for a changing environment. However, there is more we can do. We will continue to remain focused on the disciplined execution of our strategy to support sustainable growth in earnings and shareholder returns over time.

However, the bank has also outlined key considerations for FY23.

It said that housing lending competitive pressures are “likely to intensify”, as well as the deposit mix headwind accelerating, further increasing funding costs.

The NIM impact of RBA cash rate increases on unhedged deposits is “expected to peak” in the first half of FY23, with the estimated benefit of cash rate increases from October 2022 expected to be “lower”.

So, the current monthly NIM that NAB is experiencing may be close to the best it is going to see during 2023. However, investors may also pay close attention to borrower arrears. If the higher interest rates mean some borrowers can’t afford their loans, then that could cause problems, leading to bad debts.

If I had to guess, I wouldn’t be surprised if the NAB share price doesn’t move that much over 2023.

The post 2022 was strong for the NAB share price. What’s next? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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