Why I think the NAB share price is a buy right now

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computerA woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer

The National Australia Bank Ltd (ASX: NAB) share price has dropped rapidly, down around 10% since 1 May 2023. It has significantly underperformed the S&P/ASX 200 Index (ASX: XJO) which is only down by 1% over the same time period.

Part of that may be due to its shares going ex-dividend, but that wouldn’t explain the majority of the decline because the dividend would only account for a few per cent.

In my opinion, NAB is one of the best ASX bank shares and I think it looks like a good time to buy it, for reasons that I will explain below.

However, just to be clear, it’s not one of my absolute favourite ASX 200 share ideas because, in my view, the big banks collectively don’t have a huge amount of growth ahead of them compared to some of the smaller businesses.

Yet, NAB now seems to be at a very good price and it would be my pick of the domestically-focused ASX bank shares.  

Cheap valuation

As we can see on the above chart, National Bank shares are down in May and down even further from February 2023. The fall of the NAB share price means that its price/earnings (P/E) ratio is now even more appealing, in my view.

The ASX bank share recently announced its FY23 half-year result, which showed that cash earnings had jumped 17% to $4.07 billion. That’s a strong profit growth number for most ASX blue-chip shares.

It’s true that lending competition is strong and has been strong over the past few years. Yet, bank lending profitability may not be as strong as it was in the 2010s. There are many smaller lenders these days that don’t need a branch network to compete with large banks.

In the FY23 first half, business and private banking saw cash earnings grow 19.9% to $1.7 billion, while corporate and institutional banking experienced a cash earnings increase of 16.6% to $940 million.

But even if NAB’s overall profit hardly grows in the next few years, I think it’s priced cheaply. Its dividend income could continue to be resilient and the ASX bank share might be able to keep growing profit with its business lending where it has a strong market share.

The NAB share price is valued at less than 11x FY23’s estimated earnings and less than 12x FY24’s estimated earnings. Yes, there is a danger that the NAB net interest margin (NIM) could fall in the coming periods, due to competition for loans and deposits, but I’d say the bank’s current lower valuation makes up for that uncertainty.

NAB dividend

At the current NAB share price, the bank could pay a grossed-up dividend yield of 9% in FY23 and FY24, according to Commsec numbers. That suggests solid cash returns, regardless of what the NAB share price does in the short term.

Dividend growth is then expected to return in FY25.

Focused leadership

The bank is doing well under the stewardship of CEO Ross McEwan in my opinion. The growth of cash earnings in the FY23 first half was particularly impressive to me. As well, it seems prudent for the bank to focus on its business customers, rather than the intense mortgage market.

In the FY23 first-half result, McEwan said that the bank is focused on “disciplined execution” of its strategy to drive sustainable growth in earnings and shareholder returns.

A “key” part of that focus has been “staying safe and maintaining prudent balance sheet settings”, positioning the bank “well” for the risks and volatility of much higher interest rates. I think this is important – a bank needs to be resilient through all circumstances, not just the boom times. This strategy can help ensure long-term success.

It also had a group common equity tier 1 (CET1) ratio of 12.2%, well above the required amount.

Foolish takeaway

NAB’s performance is impressive and this looks like an opportune time to consider the ASX bank share. At this much lower NAB share price, the valuation and dividend look attractive. Certainly, it would be the Australian-focused bank that I’d want to buy today.

The post Why I think the NAB share price is a buy right now 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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